The Best Allocator of Capital

Advice to President Obama:

.”..we’re going to unclog the arteries. My banking experts have analyzed each of your balance sheets. You will tell us if we’re right. Those of you who are insolvent, we will nationalize and shut down. We will auction off your viable assets and will hold the toxic ones in a government reconstruction fund and sell them later when the market rebounds. Those of you who are weak will be merged. And those of you who are strong will receive added capital for your balance sheets, after you write down all your remaining toxic waste. I am not going to continue rewarding the losers and dimwits amongst you with handouts.”, Thomas Friedman wrote on Sunday.

With another $350 billion to spend, Barack Obama has a critical decision to make. In this mess of an economy, who is the best allocator of capital (how can we get the most bang for our buck)? There are three broad options:

  1. Individuals
  2. Government
  3. Businesses

drago-break-you

As our economy matured over the past several decades, banks (businesses) have been the bearer of this responsibility, but with the failure of so many massive financial institutions, can business be trusted allocate capital efficiently?

greedisgood
Yes, with a caveat. While capitalism has proven government is too susceptible to partisan & special interests, many individuals and businesses have also proven to be too susceptible to human nature, primarily greed. There are however, those that have proven different.

As Friedman points out, we must reward the businesses who have proven responsible and effective, not the reckless institutions managed by the weak leaders that brought this upon us.

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