Banking Insight Comes From Pitcher’s Sore Arm: Amity Shlaes

Can this economy go the distance? The U.S. expanded by 3.2 percent in the last quarter. Americans long for an economy that grows at 4 percent, quarter after quarter, strong enough to shrug off revolution in Egypt, central bank machinations in China and Steve Jobs’s health.

We want an economy as strong and resilient as a superstar athlete.

For that to happen, more people have to be like Gil Meche, the Kansas City Royals pitcher who refused his 2011 salary of $12 million. He decided not to hold his employer to what he was owed under the terms of his contract.

Meche wanted to keep pitching. His shoulder wouldn’t cooperate. He knew he’d spend the season on the bench or playing a limited role, not earning his salary as a starter. Meche said that he retired because he “didn’t want to be the guy making $12 million doing absolutely nothing to help the team.”

What this shows, first of all, is that Meche lives in an economy where contracts matter. Everyone expected the Royals to pay the 32-year-old what they owed him even after he failed to deliver the performance Royals fans hoped for.

More important, Meche’s move was voluntary. He took into account what would happen to the other party and chose to forgo his $12 million. As a result, team officials might be a bit more inclined to agree to slightly more generous contracts in the future because they know it’s at least possible for a player to act like Meche. He won’t play ball again, but his considerate behavior may make it easier for him to find a future business partner.

Trust Factor

In other words, a Meche economy is one in which the parties treat each other well enough that people want to do business with each other again.

This sounds obvious, but it’s not the predominant attitude in American business today. U.S. bankers never expected 2008 to be as bad as it was, or that taxpayers would bail out their companies. Sure, they’re legally entitled to receive money due them. Yet when bankers go to court to collect their bonus money, as some have, they’re telling taxpayers: “We don’t care about you. We’re just in it for the Gordon Gekko glee of free-market capitalism.”

This self-righteousness undermines respect for the banking industry. It makes it harder for banks to get the rules they want as the industry is being reshaped. That, in turn, will affect the scale of bonuses next year.

Such gotcha opportunism is also evident among homeowners, according to the latest quarterly result of the Financial Trust Index, issued by University of Chicago’s Booth School of Business and Northwestern University’s Kellogg School of Management.

Punishing Bad Banks

The survey asked respondents whether they condoned strategic default, in which homeowners walk away from their home and their mortgage contract when the mortgage exceeds the value of the property. Almost half of those polled said they would be more likely to default if their bank was accused of predatory lending. In other words, these homeowners are ready to exploit the current cultural tolerance of such defaults to get revenge for the global wrong that capitalism did in 2008.

That might feel good -- for a moment. But too many revenge defaults will drive up mortgage rates or make banks or mortgage companies more wary of lending to homebuyers.

Many writers, including myself, have detailed how irresponsible government actions slow economic recoveries. Similar behavior by individuals impedes growth, too. If you can’t find someone reliable to do a deal with, you simply don’t do the deal at all.

Honorable Cal

There was a time when most Americans knew this, as I’ve discovered while reading about Calvin Coolidge. After leaving the White House, Coolidge did what all presidents do: he negotiated lucrative writing contracts. One of these was a deal with Collier’s magazine to write 10 articles for $2,000 apiece.

Coolidge delivered all 10, but the magazine published only six. Collier’s publisher therefore must have felt a bit anxious when one day he got word that Coolidge wanted to see him.

During their meeting, Coolidge pointed out that Collier’s ran only six of his articles. Yes, countered the publisher defensively, but the magazine had paid him the entire $20,000. If the articles weren’t published, they must not have been good, Coolidge said. He then handed the publisher a check for $8,000.

It’s not hard to figure out why Coolidge returned the money for the unpublished pieces. He came from intimate New England, where people did business over and over again with the same neighbors. He wanted that next deal. The global marketplace fancies itself anonymous, but it is really just another New England. Every behavior by every individual is built into every price or every deal. If this economy treats today’s contracts honorably, it can pitch not just one but several strong seasons.

Amity Shlaes, a senior fellow in economic history at the Council on Foreign Relations is a Bloomberg News columnist. The opinions expressed are her own.)

To contact the writer of this column: Amity Shlaes at amityshlaes@hotmail.com

To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net.

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