Culture Wars

Ethan Penner, the former CEO of Nomura Capital, wrote an Op-Ed piece in last Friday's The Wall Street Journal entitled "Our Financial Bailout Culture," that led me to believe momentarily that he and I are twins separated at birth, until I realized that he's richer and smarter and writes much better than I.

In a bear market – with losses looming for investors, homeowners, financial services executives, homebuilders and the average stretched consumer – the hue and cry for the government to save everyone is reaching a fevered pitch. Even avowed capitalists who enjoyed the benefits of bull markets are now advocating government intervention. Government officials need little prodding to respond, and so the process of increased regulation has clearly begun.

Every day comes news of the increasing creep of the public sector. State governments, frustrated by the impact of the housing crisis on tax rolls, are implementing laws to stall or impede foreclosures. The Federal Housing Administration, granted (along with Fannie Mae and Freddie Mac) a huge increase in its loan limit, is now close to making the increase permanent.

The unstated premise is that, with better government oversight, we would not be suffering today's bear market and financial chaos. Of course, during the previous outsized boom, no one was calling up his congressman to complain that home values were appreciating too quickly. Meanwhile, they drained that appreciation regularly through refinancings to pay for vacations, new cars and other pleasantries, all of which created the prosperity for which politicians were pleased to take credit.

He hammers home a point I, and other bloviating free marketers, have been yammering about for some time now: "moral hazard." As Mr. Penner puts it so well, "[c]onsequences not suffered from bad decisions lead to lessons not learned, which leads to bigger failings down the road."

And so we have the insidious modern trend to shirk responsibility and blame others for our missteps. This trend, this "victim mentality," is a path toward personal disaster.

Perhaps if the Fed had raised short-term rates more aggressively, the excesses of the bubble could have been avoided. Maybe regulators could have noticed that the criteria for achieving an AAA rating had weakened markedly and inserted themselves early on. Yes, we can hope that the government takes the appropriate steps to ensure that the regulatory system improves as a result of this crisis. However, we citizens also need to accept our share of the responsibility.

Homeowners must learn that there are risks to using a home as an ATM. Investors who borrowed to flip condos must learn the downside of such risk. Individuals who steered money from insured bank deposits into uninsured money market accounts to pick up 1% more yield – like the institutional investors who purchased complex securities with little due diligence – need to know that in an efficient market, extra yield means extra risk. Those who played the derivatives market, focusing more on computer-driven pricing models and less on managing counterparty risk, must pay for that oversight. And, much as it is impolitic to say, people who took money from lenders and signed without considering how they'd repay those loans must also be held accountable.

In one of this year's primary debates, Ron Paul said it is not the president's job to run the economy. I'd add that it is not the government's job either. It is each and every citizen's job to manage our own affairs, make our own decisions, bear the fruits or painful consequences and learn our lessons.

The free market is the essence of our society's strength and is rooted in the Lincolnian precepts of accountability and responsibility. When decisions are made and actions taken (or not taken), there are consequences. These consequences are models for us to learn from and serve to stimulate social growth and advancement.

As my high school wrestling coach to say, a sadistic grin on his face as he watched one of his charges bend another into the shape of a pretzel, "No pain, no gain." Having been, occasionally, a bent pretzel, I realize that's easy to say and much less easy to endure. That realization doesn't make it any less true.

Unfortunately, I think that as far as the free market is concerned, Elvis has left the building. There's absolutely no way, in an election year, that pain will be allowed to teach anyone anything. No political party in recent memory has obtained or retained office by telling the voters to "suck it up" and suffer the consequences for their bad decisions, or, even, for the fact that life is sometimes cruel without a discernible cause. There was that third party guy back in 1992, with the bullet haircut and the funny accent, but all his straight talk gave the country was eight years of a White House resident who found an unusual use for fine cigars.

Whether or not government intervention makes hard lessons impossible to learn, or, in fact, teaches the lesson that Uncle will always be there to bail you out from your bad decisions, and even from the application of the equally painful lesson that, sometimes, "stuff happens," the government will continue to intervene to attempt to ease the pain. The only question is how much will it intervene and, when the dust settles, how will the law of unintended consequences play itself out.

Because you know it will play itself out.

Comments

[ChrisM]

Please see Volcker's recent speech reiterating much of the same concerns. Unlike Greenspan, Volcker is an excellent speaker:

http://calculatedrisk.blogspot.com/2008/04/volckers-speech.html

[Kevin]

I usually delete comments that are nothing more than people plugging their own blogs, but I enjoy Calculated Risk, so it gets a pass this time.