Self-Funding

Matthew Yglesias, writing today about the credit crisis, makes the following point about why it is so difficult for banks to take long-term, contrarian positions:

The big point here is that to make a long-term play, you may need a huge amount of capital at your disposal. And it’s going to be very hard to raise that kind of capital, because conventional wisdom will hold that you’re a crazy person. If you happen to have a vast fortune at your disposal, you can play this game. And a few people do. But there simply aren’t enough people in possession of sufficiently vast fortunes for this to work as an adequate corrective mechanism.

This concept -- that short-term funding needs lead to middle-of-the-road, uninspired and short-sighted positions -- can be expanded to many other parts of society.

A bank needing to raise short-term capital on the commercial paper markets is like a politician with an upcoming election, a baseball manager with an upcoming contract expiring, a company with an upcoming shareholders' meeting, or a developing nation with an upcoming bond offering. They are all at the whim of their short-term funders. They are at the whim of today's polls, fundraisers, standings, shareholders, stock prices or bond prices.

But society needs a few leaders who have already amassed so much credibility that they no longer need to manage the short term whims of the markets or the polls or the fundraisers. They have amassed so much capital, or so much trust, that they can become bold, courageous, long-term leaders. This is why we actually like the fact that Mike Bloomberg funds his own campaigns. We have the sense that he is going to be making the right calls long-term. We have the sense that his decision-making is going to be sustainable and that he is making decisions authentically, as opposed to merely serving as a puppet. And now he has made some good long-term calls. And that increases his trust.

The same applies to Theo Epstein, the general manager of the Red Sox. Now that the Red Sox won the World Series in 2004 and 2007, he has much more room to make good, long-term decisions. We've stopped evaluating him on his short-term performance, and started to trust that he knows what to do.

For sustainable, authentic governance, we need more leaders who have accumulated that level of trust. While it's not a very democratic concept, we need more leaders, in both finance and politics, who have transcended the short-term funding needs of their constituents. More on this later...