First Principles

Imagine if you inherited a business that couldn’t fail.

Not just that you had a solid business model, but that you were backed by an inexhaustible trust fund which guaranteed you would never to go out of business.  No matter what you did, no matter who you hired, no matter how poorly you managed your books, your stock would always rise.  And even if it fell, you could just get more money from that trust fund to replace what you lost.

Seriously – how careful would you be?

This is, of course, the simple version of the large financial firms’ reality.  They can mismanage all day long, because at the end of the day the seemingly endless supply of tax dollars will keep them afloat.  They’re too big to fail, after all.  They’re so intertwined and entrenched in our monetary foundations, that their failure would cause entire economic sectors to collapse.  Voters Innocent people who couldn’t possibly know of the mismanagement will suffer.  Some could lose their life savings!  Politicians might not get re-elected!

But the best part is when you realize that it actually benefits you to do poorly, because the government money is so much easier to obtain than money you have to actually earn by selling a good product and attracting a loyal customer base.

It’s really just a extortion.  “Gimme the bailout money, or granny’s house gets it!”  And like all extortion, the more you pay, the more extortionists will come out of the woodwork to try the tactic for themselves.

So what’s the best government policy to prevent this kind of company?  More government involvement, or less?

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Imagine again that you lived in a world without risk.  And somehow, you have some extra money, and you want to invest in an emerging technology.

Fortunately for you, financial risk has been outlawed by a compassionate government, so now you can invest safely.

So you try to buy some stock in the new company, betting on their unproven technology, but a big red X appears on your computer screen.  Some bureaucrat with a degree in Sociology has decided you can’t afford to make that investment.  After all, tax dollars stand behind all stock portfolios, now, so the government gets a say in how their money might be at risk if you choose poorly.  After all those greedy corporations acting without enough regulation back in ’08 wrecked the economy, we had to take control, you see.  And if you take (or are insured by) the King’s money, you have to play by the King’s rules.

So now you’re left with no investment.  You haven’t lost anything, but you haven’t gained anything, either.  The middle class has been preserved, because no one can escape up and out of it.  You can’t build a retirement fund, but at least you can scrape by on Social Security.

And that company?  Well, the government deemed it too risky for most investors, so most people weren’t allowed to gamble that its new technology might change the world (and turn a profit).  And maybe it wouldn’t have.  But then again, maybe it would.  Years later, people will wonder why government isn’t “doing something” to improve our lives technologically.

Clearly, more regulation will create wealth and kickstart the economy.

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Freedom and liberty have their own value.  They are, as the Franklin said and liberals so often misquote, more valuable than “a little temporary safety”.  This includes freedom to spend your money how you see fit, even if it’s unwise to spend it that way.  It includes the freedom to fail, as well as succeed.  If you aren’t free to fail, you aren’t free.

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And by the way, just when did it become the province of the Federal Government to insure every last Tom, Dick, & Harry’s stock portfolio and retirement fund?  After the total failure of every centrally managed national economy in history, why do we keep trying it over and over and over again?

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It’s interesting to hear people talk about “The Market” as if it’s an option we can choose to accept, disregard altogether, or limit with some hybrid system.  Market forces are immutable.  They are like gravity.  You can (and should) create devices and institutions that can rise above the anarchy of the bazaar, but just as an airplane designer can never forget that gravity still exists, economic policy that ignores basic market forces of supply and demand, and how human beings respond to them, will inevitably fail.

An increase in supply will decrease the value of something.  An increase in demand will increase that thing’s value.  And people will generally work to maximize their own wealth, will act in their own interests, and will not work harder than they need to without some personal benefit.

If you create a system where someone who saves for retirement is no better off than the person who lives paycheck-to-paycheck by spending frivolously, people will all eventually stop saving for retirement.  If you create a system that actualy rewards people for buying more house than they can afford, don’t be shocked in 5 years when the bills come due and the foreclosures follow close aboard.  If you build a system where the freeloader is paid the same as the workaholic, you wind up having a society of freeloaders.

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Imagine a building being built, ignoring that gravity exists.  Soon it will become top heavy, and if not fixed, will collapse – harming all the buildings that surround it.  To fix it, additional outside material is needed to scaffold or reinforce it.

If the builder chooses to look at the scaffolding and buttressing as The Solution, he will keep building higher and continue to ignore the real reason for his problem in the future.  Eventually, no amount of reinforcement in the world will keep his building upright, and it will tumble from an even greater height, doing even greater harm.

But if he chooses to use the outside help as a means to a solution, undoes the foolish architecture while the reinforcing material is in place, and then rebuilds his building more wisely, the extra expense will have been worth it.

I hope with regards to our financial systems, we make the later choice.