Ban Buybacks?

And I'll run in the rain till I'm breathless
When I'm breathless I'll run till I drop
And the thoughts of a fool's scattered careless
I'm just a fool waiting on the wrong block
--Led Zeppelin

Using GM as an example, two Harvard Business Review contributors argue that stock buybacks should be banned. Seven years ago GM was on its deathbed and would have gone out of business had it not been for a government-sponsored bailout and concessions by workers. It is unfair, the authors suggest, that GM is using cash to buy back $5 billion back in stock rather than distributing it to workers or investing in the business.

The solution, they argue is for the president to sign an executive order that bans stock buybacks.

This is statist mentality. Setting aside their demand for executive (fiat) rather than congressional (people) action, the authors fail to consider causes for the huge increase in corporate buybacks. It does not take a genius to recognize that the source of most buyback cash is coming from corporate borrowing. As investors have bid up the prices in search for yield, corporations have been floating debt on the cheap and using the proceeds to buy back their stocks.

The root cause of the buyback bubble is the suppressed interest rate environment fostered by the Federal Reserve. In GM's case, the added kicker is the government-sponsored bailout, which not only has permitted a resource-destroying operation to persist, but also establishes conditions of moral hazard that facilitates continued excessive risk taking.

The HBR contributors offer the classic statist remedy: let's put band-aids on problems created by the state to begin with. Essentially, these remedies constitute games of whack-a-mole as distortions with interventionary policies pop up here and there.

The correct solution is to return interest rates to the market, and to cease bailing out inefficient capital allocators.