let us now praise short-term profits

Few things have a worse name than the pursuit of short-term profits.  Who among us would disagree that corporations should focus on “stakeholders,” rather than just shareholders?  I mean, who wouldn’t endorse Dan Foreman’s notion that corporations have “some obligation to their citizens” and his excoration of “layoffs and bottom-line thinking”? 

And even those right-wing zealots out there who insist that profits are paramount are still likely to prefer long-term profits to short-term profits.  It seems straightforward that a long-term focus leads to greater value-creation over time, which is in both the firm’s and society’s interest.  Conversely, and as we have seen in spades in the recent crisis, a focus on short-term profits can have huge negative externalities for the rest of us.  In particular, who would endorse WaMu’s focus on just selling as many loans as possible, loan-quality be damned? 

And yet.

Perhaps the biggest challenge to the economy right now is that banks’ just won’t lend, even when the loans seem likely to increase their short-term profits.  The problem is that it is simply not in their long-term interest to do so, even they might increase their short-term profits as a result.  Their best strategy seems to be to hoard capital– including that provided by the Treasury in the bail-out, and intended for loans– and/or use it to acquire weaker banks, so as to be stronger competitor after the shake-out is over.  Joe Nocera’s article on JP Morgan is a must-read on this (see also the NYT editorial based on Nocera).  It appears that if the Treasury wanted banks to do what is in their shor-term self-interest, they would need to compel them to do so.  Quite a switch, huh?

The upshot is that, while one can certainly overdo it with a focus on short-term profits, one can underdo it as well– at least when it comes to the finance sector.  Everything in moderation…