A 700 Billion Dollar Bailout Plan that will Actually Work
Nothing like a crisis to get the mind working.
It appears that the US is going to provide investment banks $700,000,000,000 (written out for effect) to cover up for the mistakes related to their "financial engineering". This is all well and good - and has to be done, mostly because something has to be done to make sure the "counterparties" don't go broke (def:counterparty = think people Lehman Bros owed money to). That said, because of this mistake, we can ill afford to make many more.
If you looked at this through a personal lens, lets say you are a normal person. You get frustrated with real work one day, and you decide to go to Las Vegas on vacation. You discover that in Las Vegas, you can borrow lots of money and, for awhile, go along making money playing poker or counting cards in blackjack. This works for awhile (16 years) - but then someone changes the rules of the game on you (say, blackjack now pays 5/3 rather than 3/2 - or house values stop going up). Suddenly, you find yourself with all your money + all of "their" money on the table, and you draw 16 when the dealer is showing an ace. Rather than take the insurance, you decide to stay, the other card comes up (a 10), and you lose. Everything. Plus some.
What do you do now. You are like Clark Griswald at the end of Vegas Vacation. No house, no motor car, not a single luxury. You can't borrow at all - you are tapped out, nothing left but the shirt on your back.
So, after you wake up in the morning, on the street, hung over from the free drinks that the waitress gave you in sympathy, wondering what you are going to do next. Then, along comes a nice man (taxpayers), willing to give you a new $50k ($700B) loan. What do you do?
Do you waltz back into the casino? Or do you head to university and decide to stop investing in a losing game, and rather invest in yourself - that is, make yourself more productive. Maybe get an MBA, maybe become a nano-technology expert, or, at least, invest in someone else who is.
The bailout plan I am proposing is exactly that. Given we have seen what the dividends of financial engineering are, I think it is high time to stop investing so much in "financial engineering" and start to invest in "engineering engineering". Imagine a world where, in a year, we create 350k new high tech startups. So many such that even if one tenth of them work out (typical result from VCs), we end up with 35k new, prosperous companies that create really good, high technology jobs that:
* Get us off foreign oil, through more advanced green technology
* Make companies, hospitals, universities, and government more productive, through better software - in particular - better user experience, better business intelligence, better inter-operation, better maintainability
* Cuts the unemployment rate directly from 7% to 5% by providing jobs directly to around 2% of the US working population. If you count indirect jobs created because of the general stimulus, you reach full structural employment
* Through productivity enhancements and direct stimulus, puts us on an economic growth curve that rivals China
* Last but not least, helps the financial services industry because all these companies will probably need mergers, aquisitions, wealth management, etc. - think of how busy wall street was during the dotcom bubble. Now multiply that times 10.
The plan works by providing 1M of funding to any high-tech entrepeneur who has a reasonably viable technology idea and a realistic business plan. Given that 1 in 500 US adults probably has the means to develop a reasonable hi-tech idea and a business plan, you get to around 350k such companies that get funded. Enough money to take a prototyped idea to a working product. Enough money to hire 3 or 4 people and keep them employed for a couple years while the idea develops. In software, amazingly, that is enough people to get a startup going, while employing 1.4M people for a couple of years. Now here is the key... in exchange, the government gets a 20% stake in the company - and gets to put on some controls similar to what a VC would do - i.e. you cant overpay yourself, you have to have an independent board, etc, while getting away from the bad VC stuff, like stealing your good ideas and giving them to a competitor. This initial phase costs 350B.
The next phase, of course, is based on 1 out of the 10 ideas becoming viable companies that generate profit. Once you hit profitability, you become eligible for a subsequent 10M investment. Enough money to keep a staff of 10 people going for around 10 years despite what happens. Or hiring 25 over 4 years and really blowing something out. In exchange, the government gets another 10% stake - 30% total. While the subsequent stake is smaller, the chances of success are much higher.
It gets better though. After this phase, we have the private sector step in and provide the mezzanine round for the 1 out of the 10 at this level that are good enough to become billion dollar companies. The remaining 9 of 10 perhaps get bought out once a buyer is found that allows the government to realize its initial investment plus some risk premium, plus enough to cover the losses in the companies that didn't work (say, 50M). In essence, the government makes money on the deal, and the VC sector gets relieved of its duties with regard to early investments that, right now, they are too scared to make because everyone is pulling out of funds and taking positions in either "cash" or "fetal".
Think of the number of people employed here - we have 35k new, profitable, growing high technology businesses - most of which employ a couple dozen people. Businesses that are engaging in trade with the all the other non-technical businesses, making them more efficient. Actually working with hospitals to move them off paper. Making Medicare more efficient. Coming up with the breakthroughs we need in Green Energy. Doing the critical research and development needed to solve our most pressing problems.
The chief problems I could see with a plan like this are that you would flood the market with new technology - which would take some time to sort out. It would increase the supply of new tech, which if everyone chased the same business plan, would lead to pricing pressure and reduce the ability of these new companies to make a profit. Ironically, that is exactly why VCs and private equity can't do this, because most of them have a herd mentality that makes you end up with 25 different search engine companies in 1999, and 25 different social networking companies in 2007. One large investor, spreading the money around different types of business plans would help make sure that the capital doesn't self-cannibalize. Create competitors, but don't create so many that you end up with 30k of the same thing.
The other problem is that one could argue that there are not enough engineers to absorb all that money. If that is true, just reduce the scale of the investment. That said, I think the worst thing this does is take intellectual capital that is currently invested in some projects that are of marginal value - something you see in IT departments everywhere, and it re-invests it in ideas that the practitioners themselves believe in. People are always more efficient when working on something they own - and you would go from IT people who own nothing but renewable lease on a spot on an org chart, to a real company. In the worst case, you end up with a ton of engineers who suddenly have experience running a business! Talk about solving the business/IT gap! Besides, since all that works was going to India, we should have nothing to worry about, right?
This plan - which in an act of Ego comparable to Boone Pickens, I will call the Erickson Plan - will make the government money, will revive the economy, and will restore our position of leadership in the world - investing in the intellect and inventiveness of our people, rather than in the faith that giving money to wall street will solve our problems. It will demonstrate to the world that we are serious about competing. It will probably cause other nations to make similar investments in their own economies, just to keep up. It will deploy capital towards where the IQ points are, rather than simply where the best K street lobbyists live.
I can't think of a more win-win arrangement than that!