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Darwin vs The Fed

April 13, 2010

Somebody told to me the other day that I was Fringe. I immediately thought of that sci-fi show on fox and didnt get the reference, but I figured he was talking about my views on the Govt, finance and the Economy.
Merriam- Fringe: a group with marginal or extremist view.
So I guess I’m an extremist.
I find it frustrating that people dont see things the way I do. Whats wrong with everybody? Or perhaps it is me. Case in point, me and the old lady were watching that new LIFE series and there was this seal which had swam away from the refuge of a chunk of ice. The dumb seal was oblivious to the fact that a pack of giant killer whales were heading right at him. He was quickly surrounded – prompting yelps from the wife “ack! poor seal, swim away!” On the other hand I just wanted the seal to be eaten. I had no problem with the whales finding a meal. Perhaps this is where my mind works differently as I feel there is a natural order to things.

Most people, provided with the opportunity, would save the seal. Seems like the “right” thing to do. Never mind the killer whales starving to death, but what about those seals watching from the iceberg saying to themselves “Man, here I am with my fat ass freezing to this damn slab of ice and this fuck face is out there practicing his aquatic dance and HE gets saved because what, he’s cute?” What the seal should be saying (after the other seal is eaten) – “see, this is what happens you want to swim into those risky waters – let this be a valuable lesson to you.”

I can already hear people saying “you dont propel the country into a great depression in order to teach a lesson or maintain the natural order of things!” – Fine, agreed. My point is that we have not been saved from a depression, the catastrophe has simply been postponed. Instead of cleansing out the weak performers, we have rewarded the weakest managers and CEO’s.. The “rebound” of the economy has been fueled by cheap (lazy) money ending up in the wallets of those same people who put us on the edge of the cliff. The only companies doing well are the large international companies who benefit from global demand via a weak US dollar and the zero int. rate policy allowing for cheap funding via the capital markets (Junk bond issues are most likely record-breaking) Revenues have not increased, but profits have benefited from a reduction in fixed costs (int, rent, payroll etc.) Ok, I’m getting off track. So here is a list of the “good” news from the bailouts and government interventions.

The “Good” news
Companies such as AIG and General Motors have stabilized and are cruising down similar paths of fortune.
All of the major Banks have been nurtured back to health and experiencing record profits.
Fannie Mae and Freddie Mac continue to pump money into the mortgage market.
Home owners have seen their house prices stabilized and even some modifications to those borrowers who are underwater.

The “Bad” news
Companies such as AIG and General Motors have stabilized and are cruising down similar paths of fortune.
All of the major Banks have been nurtured back to health and experiencing record profits.
Fannie Mae and Freddie Mac continue to pump money into the mortgage market.
Home owners have seen their house prices stabilized and even some modifications to those borrowers who are underwater.

I can’t write it much better than this guy:
By John Tamny
Back in 1988, real estate mogul Donald Trump wrote the bestselling book, The Art of the Deal. One of the highest profile success stories of the ‘80s, Trump’s book was written to explain to those not-yet-rich how to become fabulously wealthy like, well, Trump.

Fast forward three years, and Trump released The Art of Survival, which chronicled his recovery from a negative net worth that the Wall Street Journal reported at the time as being in the $300 million range. Trump failed in the late ‘80s, and if the Journal’s account was true, failed stupendously, only to recover again. And since the victors invariably get to tell the tale of their success, Trump has continued to release other books over the years talking about how the ambitious in our midst can become like him.

Trump’s professional rebirth, while offensive to some who decry his self-aggrandizing ways, at the very least serves as a reminder that failure is in no way permanent. And with the U.S. “economy” nothing more than a collection of self-interested individuals, just as individual decline is hardly everlasting, neither is “country” economic decline perpetual.

That is, unless Federal Reserve Board Chairman Ben Bernanke is the economic storyteller. At a dinner last week, the Fed Chair who doth protest too much yet again forwarded the notion that he and other bureaucrats “saved the world”, to paraphrase some of his enablers. Bernanke himself asserted that “Although the economic consequences of the financial crisis have been painfully severe, the world was spared an even worse cataclysm that could have rivaled or surpassed the Great Depression.”

Bernanke’s argument is that absent the various federal bailouts of banks which the Fed played a major role in, long-term economic decline would have been our reward. Logic tells us he gets things 100% backwards.

Indeed, the failure of financial institutions beginning in 2008 was more than anything a sign that the economy was on the mend. To make basic what is already basic, when businesses can no longer fund their daily operations – meaning investors have lost interest – the market signal is that they’ve failed their customers, and should be allowed to meet their natural fate.

In that certain sense, bankruptcy, while painful, is an economic good for customers, and nothing more than a change of ownership. Bankruptcy means that poor managers are relieved of their duties so that better managers can deploy the debased assets more profitably. And if the poor managers are forced to sell their assets at fire-sale levels, the potential for profits to be achieved by the new managers is greatly enhanced.

Business failure, be it among car companies, software firms or banks, means that the economy is being cleansed of non-economic activity. Failure, in short, means that capitalism is working for the rough justice wrought by profit and loss weeding out the unsuccessful so that either the successful or ambitious can attempt to make work what the previous managers could not.

To believe Bernanke, the U.S. economy avoided Armageddon for bankrupt firms being propped up on the backs of taxpayers, but simple logic tells us the Fed’s actions extended, rather than deterred economic hardship. In bailing out the banks our federal minders not only perpetuated non-economic, depressive activity, but they also planted the seeds of future crises for the economy not being allowed to naturally rid itself of that which didn’t work in the first place.

Bernanke’s support of taxpayer bailouts as the economy’s savior is the equivalent of the drunk waking up hung over, fingering the hangover as his problem, then resuming the drinking in order to blunt the pain caused by the previous night’s activities. In truth, the hangover is the signal to the drunk to be more circumspect when it comes to drinking. The hangover is the drunk’s cure.

Much the same, the failures among banks, far from the economy-killing problem, were the cure for signaling to prudent and imprudent banks alike what not to do in the future. Capitalism is as much about failure as it is about success, and the much-needed collapses among financial institutions would have once again served as a sign of economic rebirth if allowed thanks to the banking system being purged of poor financial practices.

Looked at in light of the “economic depression” that Trump experienced in the late ‘80s, far from a sign of long-term economic decline on his part, his ability to fail ultimately taught him how to succeed. Considering the violent collapses in the banking world of not long ago, as opposed to them threatening long-term economic frailty, the awful way in which they nearly went under happily revealed for all to see just how poorly they were being run. The banking practices that delivered them to bankruptcy were the recession, their actual bankruptcy the economy’s revival.

And since failed businesses don’t disappear as much they change hands, had the free markets been allowed to work their magic whereby the banks fell into bankruptcy quickly, rather than elongating the recession, their quick declines would have shortened it for new, more sensible management speedily entering the picture. Failure is not death, instead it constitutes revival as assets fall into the hands of those more skillful.

All of this might be obvious to our Fed Chairman were he to cease looking at the U.S. economy through what is a very foggy macroeconomic lens. If so, he would soon become aware that economies are merely a collection of individuals, and that success and failure among individuals is by no means perpetual.

In truth, we can neither succeed nor fail too much. But wherever we presently are on the proverbial Bell Curve of individual economic health, as Trump’s example makes clear, simple odds suggest that during our careers we’ll experience a fair bit of both, failure by no means forever if we’re allowed to learn from our mistakes.

Going forward, Bernanke and his enablers will continue to excuse his and other governmental actions as necessary to avoid economic calamity. Many will accept these explanations without comment or protest.

But for those of us who correctly break human action down to the individual level, the bailouts which Bernanke defends will become increasingly suspect. Just as the allowance of mistakes authors and speeds up success on the individual level, so does it by definition achieve the same on the company or “country economy” level.

In that sense, the only “crisis” of 2008 concerned the unwillingness of our political masters to allow the bankruptcies necessary to cleanse the economy of non-economic practices. Hopefully we’ve learned from this mistake.

7 Comments leave one →
  1. la mama permalink
    April 13, 2010 10:11 pm

    Very good article. Like you say, a clear explanation.
    And I agree: The healthiest thing for the economy (for any business, for any individual … at least under ‘normal’ circumstances) is for the consequences of any action to be allowed to TAKE PLACE. Otherwise things are falsely kept afloat/propped up … we’re not talking about a helping hand or a temporary bridge here, are we? It was a collossal (sp?) miscalculation, based on some theories and pronouncements of some admittedly brilliant economists.
    Well, time will tell, Mr. Fringe. Appreciating your updates!

  2. debaseface permalink
    April 14, 2010 7:24 pm

    Agreed – it is the healthiest thing for any business/individual to be allowed to experience failure – otherwise things are falsely kept afloat/propped up.

    This reminds me of that chess champion in russia (circa 1980) who had that son whom he groomed as his prodigy. This guy, (Boris?) soon realized his son, although quite a capable chess player, was never going to reach the ranks as he had hoped – mostly on account of similar mistake in his game (lets call it the queen 6 move) Over time as Boris noticed his son make the same mistake again and again – he decided to stop exploiting the move as he knew how distraught his son would become after losing a chess match.
    A few years later Boris was shocked to see his son advance to the semi finals of an international match only to lose the match to the queen 6 move. The son was completed devastated.
    Boris found him strung up by a belt in his closet the next morning.
    If only he was able to learn from his mistakes.
    (story for illustrative purposes only)

  3. April 15, 2010 7:17 pm


  4. funk permalink
    April 15, 2010 7:38 pm

    Great post.

    I like the analogy with the seals and whales, but I would change it slightly to reflect how I see things from my lens. Not only are reckless seals being saved, they are being saved while the prudent ones are being tossed to the whales. Winners/survivors are being chosen at the expense of something else. Low rates help banks make boat loads of money for doing nothing, while forcing grandma to trade down on her meager fixed income.

    To paraphrase a NYT article – Lehman was not irresponsible enough to get saved. That makes no sense, but is true.

  5. A. Strung permalink*
    April 15, 2010 11:01 pm

    If there was a legitimate risk of a “Totally Awesome Depression” brought about by precipitous collapse, then I have no problem with the entities in question being propped up – temporarily. It’s all about the velocity. But what I don’t understand is why they aren’t then dismantled or sold or reconfigured by those who did the propping – namely the US government and its “shareholders” – me and you. Call it socializing but it’s better than letting these beasts continue to run wild.

    To go with another drinking-related metaphor, I picture a very large and obnoxious man standing around getting absolutely wasted. Me and Nik are sitting on the floor playing cards. The big guy passes out while standing up and almost comes crashing down on us but we catch him before he causes any great injury. Then we slowly lower him to the floor. Then we run to the tool shed, get a couple hacksaws and chop him up.

    Anyway I feel like the “quoted” article is a bit technical, talking in somewhat schematic terms and never acknowledging the repercussions on “main street”. I’m not suggesting that should be the be-all end-all but it’s conspicuously absent. Just a tip of the hat to all those that might be living underwater due to the advised clean economic break would help his case, imho.

    Speaking of living underwater, on the seal and the orcas: The seals aren’t really making a choice by swimming in the “risky waters”. That’s where they live. Seal gotta eat! It’s about the same as getting killed in a car crash. Yeah it’s risky driving but you’re not deliberately taking chances, it’s just an inherent risk of the lifestyle.

    I don’t know about this “natural order” business though. Are human beings unnatural? Possibly, but as far as I know we are just as much of this natural order as any other critter. Moreover, we run this shit. If we feel like saving something, goddamn it we’ll save it!

  6. tiefighter25 permalink
    April 18, 2010 10:35 pm

    Screw it all, dust off “Plan B”, invade Canada already.


  1. Lessons learned « Ruder Forms Survive

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