Thursday, October 09, 2008

Market Meltdown Hysteria

As a foreigner in a foreign land, one of the touchstones to home is sports. We don't really get ESPN here, instead we get an ESPN/Starsports hybrid, alongside three other sports channels. There is an African sports channel, an Aussie one and a Thai channel.. it can be interesting at times because you'll see a lot of obscure sports, like deep sea fishing, futsal world cup, all sorts of para-olympic sports, equestrian events, etc. But in the end, I probably watch the ESPN hybrid the most.

So yesterday, the two lead stories on this version of Sportscenter was about soccer and F1 racing. Good enough, because I've grown interested in the former and I've always been a car guy, so the latter is up my alley.

Except that the stories weren't sports stories, but rather they tried to inject the current economic crisis in the stories. For the soccer bit, the reporting was about how much top teams in the English (Barclays') Premier League were paying their players in salary, opinion that given the current world financial situation those salaries may have to go down, and a report about how UEFA is looking into punishing teams that have too much debt. The ESPN dudes go on to make it sound super-ominous that teams have debt and that somehow this was a bad thing for the game.

Ugh. This is like a lot of bad journalism that goes on these days within the business press and in the general press corp. There is all this hysteria about, and frankly it is sickening.

I mean, it's a *good* thing that EPL teams have debt - it shows you that someone must think that the team as a business is a good risk, and that's why they lend the team money.

EPL teams have no salary cap, and undoubtedly more money buys you better players. If I'm a fan of a team, darn it, I want them to spend as much money as possible in buying players. And getting into debt will allow that (just don't raise ticket prices too, too much!).

This shallow sort of reportage is such an affront to my sensibilities. Don't these reporters and editors understand that debt can be a hallmark of a good business?

Just imagine you're Ray Kroc and you opened the first McDonalds' and proved the concept of your business. So how do you expand? You can do a cash-financed expansion, which is basically waiting until you've saved enough profits from the first location in order to pay for opening the second location. Or you can do a debt-financed expansion, which is basically borrowing money (from a bank or your franchisees) to open your second location.

So borrowing money can help businesses become bigger and better businesses. After all, if the business borrows money at 10%, then that business expects to get returns at 10+%. And if a business does not expect to get returns at 10+% and therefore chooses to not borrow money, couldn't an argument be made that such business should just sell itself off and close up shop? Then they can just take that money and loan it to someone else at 10%. You'll make 10% without having to work, isn't that better?

It's frustrating enough these days to watch TV and read the papers, can't I get my sports free from malformed economic thoughts?

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