If you can't guess from my previous dozen posts in the last week, I'm referencing what's going on in our financial system right now and the bailout bill. One of my biggest arguments with much of the government intervention in the past year and in particular the bailout in front of Congress is it attempts to artificially prop up companies who would otherwise have failed. There are many pundits that will talk about how it's in our interest to support these companies because it's needed to help the economy recover, keep us from loosing jobs, etc. No, No, No, let me explain why failure is not just important, it's critical for a healthy, long-term recover.
To use an analogy, for several decades our forest service took on the policy of trying to prevent ALL forest fires, both big and small. Forest fires are bad, right? What they didn't consider in this policy is forest fires are part of the natural cycle. They cleared out underbrush making space for regrowth in the forest, and in fact several species of trees actually require fire as part of their natural reproduction process (seed cones open in a fire). As this policy continued for decades it was discovered the forest fires got much larger, more damaging and the general health of many of our forests began to decrease. Within the last decade or two this policy by the forest service has been reversed and it is now policy in many cases to proactively set fires in some forested areas.
Recessions and tough economic times serve the exact same purpose in the corporate space. The weak companies with failed models are cleared out and smaller more nimble competitors move in to fill the void, recreating jobs and helping the recovery. Yes it's painful for a short time, especially if you're one of those people that works for a failed company but without this process you never get a true economic recovery.
Look no further than our current auto and airline industries for proof of how critical this process is. We propped up large, slow moving automakers and airlines who's business plans simply don't work under the guise, of it being good for the nation. We've done this for decades and it has created two entirely dysfunctional industries. Had Chrysler years decades ago, we almost certainly would have seen smaller US competitors move in to fill the void, who would have been more nimble and forward thinking and able to compete with the foreign companies who instead blew past "The Big 3".
This is extremely relevant to the financial, lending and real estate industries of today. No one will deny they are in a state of disarray right now, but do we want to attempt to avoid the pain and keep them in a perpetual state of disarray or do we want to take our medicine and have a true recovery and a return to a healthy market?
See also: Why I am so Livid About the Bailout
Can't agree with you more. Politicians don't think like capitalists, they think like socailists.
I agree. We are putting a band aid on something we should just sever. If you and I make bad investments do you think we could call up congress and ask for a bailout? No they would tell us too bad, suck it up. . .
Matt, my biggest concern in a bailout for these financial companies is we are moving away from free enterprise into Socialism.
Thank you, Matt for the post.
Gary Woltal, Weeks ago I hesitated saying exactly what you just said. I was afraid of being perceived as anti-american. But, now I see these same comments everywhere. I guess it is not so anti-american. WELL SAID! WELL DONE!
Clap, clap. Applaud, applaud. Exactly right, Matt - if actions don't have consequences, then wrong actions will continue. Let the chips fall where then may, when they may - and we can get on to real recovery much faster.
Well, it certainly is time to clean up messes -- hopefully the failures will set the stage for better business in the future. ~ Evelyn
No doubt it will pass, but not until the tree is fully decorated.
Matt, Again I salute you, sir! Not only do I admire the depth and breadth of your knowlegde and comprehension on this subject, but I also agree with your position. Please keep leading the AR charge to enlighten "we the people" so perhaps we'll not only be better enformed, but less apathetic and actually begin taking steps as individuals to try and make a collective difference. Thanks for your great example!
Matt, The forest fire analogy is spot on. I do feel the FED needs to do something but it needs to be on a much smaller scale and funds should be set aside to assist the little guy who is really going to need it. Let the big corps go down. The void will be filled and it will make our whole economy so much stronger. It will be real interesting to see how this all plays out.
Matt, so true, but when big companies fail, like in Michigan it kills our economy. I know I live here, and with all the layoffs since 2001, we entered the recession before the rest of the nation. Our decline is based on job losses or the PC word "restructuring" not so much the sub prime although that effected us in 2007-2008 like everyone across the nation.
I agree with you, IMHO GM and Ford, and Chrysler had the opportunity to change back in early 70's. They are a dinosaur. Unfortunately Michigan is top heavy with the automotive industry, almost everyone is either connected to the Big 3 or has a spin off company that makes widgets for the cars.
Lee Iaaccoa, was able to take a bail out and then return all the money to the gov't in a shorter amount of time than anticipated.
There are so many people hurting here, with a 11% unemployment rate. Of course Mi has been a high tax area, both for business and income taxes.
Why am I still here? But you get my point another failure and it would be a disaster.
Matt. Many of the same arguments were floated at the beginning of the Great Depression... at least I have heard that, I haven't verified it. But also, through things like the Community Reinvestment Act and the expansion of Fannie and Freddie, the government actually helped to create the crisis... so shouldn't the government also be part of the clean-up?
Of course I am pretty ticked that the Democrats want to give a massive amount of money to groups like ACORN as part of the Christmas Tree that they see in this bill.
Great analogies and I couldn't agree more.
Lane: The Community Reinvestment Act that you mentioned is one of the causes of this crisis. Yes, the clean up is going to require lots of goverment work by the government. My argument is the government is taking the opposite actions that they should in order the insulate main street and the economy from the crisis.