Clearly, in the minds of much of the press and perhaps most of the public, there IS a link in that both groups have been driven by greed and avarice … or so it is assumed. But is this actually true?

The neoclassical economic approach (and the one that underpins the position of much of the press on this matter) is that both groups have been exercising rational and fully informed decision-making and have concluded that the long-term financial benefits accruing from their decisions are of far greater economic value than the costs incurred. But this is to fully misunderstand that neoclassical economic theory simply does not apply in cases where a behavioural approach makes more sense – in fact, economists, in their attempt to be regarded as the umbrella science for understanding everything that happens in the world, have even invented a new branch of their ‘dark art’ and called it behavioural economics. In this version of economics, the practitioners say that neoclassical economic theory is always correct except when it is wrong!

The reality of what has happened with both the bankers and the British parliamentarians is that they have not been behaving in an economically rational and fully informed manner but, rather, have been subjected to a version of what behavioural psychologists call ‘group think’. Behaviourists recognise that when someone sees others in a group behaving in a certain way without suffering any ‘cost’ to themselves, then they assume that the behaviour exhibited by the group members is both acceptable and approved. Once the observed behaviour is seen to be ‘normal’ for the group, the observer adopts it when they join the group. This not only removes any guilt from the new participant but also ensures acceptance by other group members. The whole cycle then becomes a self-perpetuating norm. The bankers took ever-bigger risks because such behaviour was a ‘norm’ within their group environment, and the acceptability of their behaviour was reinforced by the payment of large rewards. The British parliamentarians utilised the flexibility of the expense claim system in a way that ALL parliamentarians have done (the PM, Gordon Brown must be dreading the moment that his expenses are exposed!) and, since everyone does it, they have assumed it is acceptable and since all the other MPs do it as well, then group membership is reinforced. Approval of the behaviour is then delivered by the expenses being paid.

The world’s bankers and British MPs are neither dishonest nor greedy – any more than anyone else is – but they are guilty of suspending their ethical decision-making in favour of group norms. As such, they’ve done nothing wrong and should not be punished. Punishment is for those who have transgressed the rules and regulations – and for those that have exposed the lack of judgement of their peers (look what happens to whistleblowers and others that break with the norms of the group). We shouldn’t be attempting to penalise bankers and MPs, we should be looking for ways to ensure that the system is changed and regulated in a way that ensures that this form of behaviour is not allowed to get out of hand again.

On the other hand, we can expect that those responsible for ensuring that the banks and the MPs behave in a manner that is acceptable to their stakeholders (including the taxpayers and society in general) do their job properly – and if we’re looking for scapegoats, then we should look at the CEOs and other senior managers of the banks along with the party leaders in the British Parliament (including the PM) and if they did nothing to avert the abuses, then they should be called to account and fired! Penalising junior bankers by eliminating the bonus system is simply wrong – a subject I’ll come back to in a post in the near future. And penalising ministers and other MPs is also wrong. It is the leaders of these institutions, those that permitted and perpetuated this systemic abuse, that should be removed – and the sooner the better.

For many years the unions and their bloated and unrealistic pensions plans have been bleeding General Motors and will continue to bleed GM until it implodes and becomes little more that an interesting case study for university professors specialising in the collapse of Western manufacturing. Are the unions to blame for this – well, yes … and no! They did what they were supposed to do and extracted whatever they could from the employers on behalf of the workers BUT their interest was strictly short term and focused entirely on what they thought they were entitled to rather than what was sustainable for the company over the long term. In many ways, the unions thought that long term planning was concerned with what they would do at the weekend, while short-term planning was about what they would eat for lunch.

Unfortunately, the management of GM had much the same mind set but they also had a profound lack of understanding about their own industry and where globalisation was taking them. Although the problems go back decades, one only needs to look back at 2005 when, despite having invested billions of dollars in new cars, GM found that it had lost market share and by the end of 2004 hand just 27% of the US market – the lowest for many years. They immediately ramped up product and marketing of gas-guzzling SUVs as the answer to their problems but promptly lost $1.1 billion in the 1st quarter of 2005. And the management reaction was to say ‘no problem we have $19.8 billion in available cash and $8.3 billion in bank credit lines.

That didn’t stop them losing $10.4 billion in 2005 and by early 2006 the company was well on the way to bankruptcy – their cash mountain was gone, their bonds had little more than junk ratings and their share price had shown effectively no growth for the last decade. Further more they were obviously and suicidally focusing on the wrong products and service – the price of fuel was on the increase, customers wanted smarter, smaller, and more economical cars and GM was focusing on bigger and bigger SUVs, Hummers and other fuel-inefficient vehicles.

The loss of a further $38.7 billion in 2007 should have sent up warning signs and focused the minds of the management but instead they continued to push their clunky inefficient vehicles and also embarked on a channel conflict approach to selling cars: they started to use websites to sell vehicles – completely ignoring the evidence that tactility was a critical issue in car buying decisions (Tactility is the term to describe the fact that a buyer needs to experience a product in physical reality when making a buying decision.) The channel conflict was with the dealers and the evidence was that GM had launched either a deliberate or stupidly unintentional war with the dealers and promptly lost their loyalty.

In the autumn of 2007 – before the sub-prime market collapse started to be a worry – the death throes of GM were evident and a self-fulfilling prophecy. By March 2008 inventory was through the roof, sales had plummeted, and the management were fighting for survival – but you can’t get things so wrong for so long to be able to survive without huge amounts of pain and that became apparent in July 2008 when there was no question but that GM was doomed.

The rest, as the saying goes, is history: the unions still want their generous conditions and pensions, the company can’t pay them; suppliers want payment in 15-30 days given the tightness of credit but GM can’t and wont pay in less than 55 days so the suppliers are going out of business; sales are in free fall because no one wants to buy a car from a company that will probably not exist in a year’s time.

And the GM solution: to ask for $30 billion from the US government (more than the entire 2009 NASA space budget) and even that won’t save them. They need $86 billion (by their own calculation) to restructure even under Chapter 11 protection. GM then hauled their battered, broken and incredible story to Europe and asked for $6 billion from European governments – all without any real sense of how they were going to get out of the mess they were in.

With all its European businesses now up for sale, GM has decided to sell its stake in Suzuki and will probably have to sell its Asian businesses as well. In the US, they are offering to shed 20,000 jobs (13.5% of the workforce) – but to hold onto the corporate jets and CEO’s perks, no doubt – when, in reality, they need to halve the work force and get a completely new management team. And in a sign that the situation is not devoid of irony, Fiat, in which GM invested $2.4 billion some years ago, has offered to take over running the company in exchange for a 35% stake.

No, the collapse of GM has nothing to do with the world financial crisis no matter what its management try to claim – GM’s collapse is self-inflicted and the solution is Chapter 11 bankruptcy at the best and complete oblivion as the most likely. This is a harsh message for the people of the USA, but GM is no longer fit for purpose and it would be kinder and less traumatic if the company closed down now and allowed everyone to get on with their lives.

The result of the the car manufacturers going bankrupt will be very hard on the US economy and may well be catastrophic for some sectors and we can be certain that the US people will suffer, but it will be for the short term and the US economy will come out of the mess in a healthier state than ever before. Short-term pain for long-term gain – unless, of course, the politicians cobble together a fudge and commit the US to long-term inefficiency.

What was unedifying, however, was to see that the Democrat party has shown some of its true colours by pushing forward this faulty, fundamentally misconceived, bill. It would have been better for the Democrats and the president-elect, Barak Obama, if they had thought it through before declaring that they would bailout such inefficient industries. Equally unedifying was the spectacle of the Republican party rejecting the bill as a way of punishing the workers, and demanding that they take pay cuts. It would have been far better to have rejected the bill simply because it was wrong.