The Real Cost of Rewarding Failure

Sep 8, 2008 12:00:00 AM / Admin

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While the move by the Treasury Department on Fannie and Freddie was necessary, it isn't without its costs. As I look at the stocks that are up today and compare them to those that are down, I see an eerie parallel that reminds me of words I shared in our most popular blog entry to date, Banking, Fidel Castro and the 8th Grade. At the time of the writing, the Bank of England had just privatized a bank with bad loans. The following excerpt from the blog entry is likely why it was so popular. Incidentally, I have since met and talked to George Cull on several occasions and he promises that he has some other stories to share as well! **** Speaking of communism, there were some interesting responses today to Art Laffer's Op Ed piece last week on the nonsense of government rebates as a form of economic stimulus. From my home town of Peninsula, OH came this gem from George Cull, an eighth grade teacher.

I teach eighth-graders about Karl Marx's "take from each according to their means and give to each according to their needs."

The teacher takes away 20 points on a test from those who got 95 and gives those points to those who had 55. Therefore everybody now has 75. OK class, will the 55 students study for the next test? No! Why bother studying (working) if it will be given to you. And what will the 95 students do? The same thing. Why bother working (studying) when it will be taken away. What will happen to the class average (the standard of living) on future tests? The average will go down. Eighth-graders understand this. **** As I look at the stocks on my screen that did well today and compare them to those that did poorly, I see George's story being played out in spades. Those with the highest ROE's, profit margins, growth rates etc seemed to be giving their success to those who have done the poorest. Is it really a coincidence that this happened on the same day of the government's largest bailout ever, or am I just loony and seeing things?