The “Night of the Living Dead” Economy

Yesterday Ben Bernanke announced that the Fed is “considering” allowing Wall Street firms more time to draw emergency loans. The unprecedented loans to Wall Street began in March when the Fed loaned money to JPMorgan in order to bailout Bear Stearns. On Monday, the Senate advanced a $300 billion dollar housing bailout bill. On Sunday, my family and I hiked our first high peak of the summer season.

Am I mixing my blog posts? What could my hike possibly have to do with the Fed’s loans and housing bailouts?

I have been hiking the White Mountains of New Hampshire for well over 20 years. The peak we hiked this past weekend, Mt. Tecumseh, is one I have hiked perhaps 7 or 8 times. The first time I hiked Tecumseh I was a much younger man; I was literally twice as fast as I was this past weekend. As so often is the case, my physical prowess peaked long before my emotional maturity did. With hiking, emotional maturity means that you understand your limits, you plan appropriate hikes that stretch you safely beyond your current limits, and you have the discipline to commit to the training that is needed to accomplish your goals. With my emotional maturity still growing, I have been able to accomplish hiking goals that I never even thought of when I was younger and much stronger.

On Sunday, at the half-way point, I noticed how comparatively “slow” my wife and I had become. I was at a choice point, I could allow my ego to concoct a story about my declining abilities. I could get lost in my thinking and ruminating about the days when I was faster. Of course, doing so would take me from the present moment, slow me still more, and ruin the enjoyment of the day.

It is easy for the ego to rail against what is; but wisdom lies not in the voice of the ego but in the intelligence that is beyond. I can panic and as a consequence overtrain and risk injury, or I can exercise in prudent ways that will maximize my years on the trails. I can go to the doctor and demand some miracle drug or injection, or I can take time to maintain a healthy lifestyle and a healthy diet. I can overlook my current abilities and plan risky hikes that put me and my family in danger, or I can continue to enjoy the mountains commensurate with my abilities for many years to come. No matter what I do, the stark truth of life is that no measure I take will produce any guarantee.

So what does any of this has to do with the economy? Plenty. Collectively as a society we are like aging hikers who demand that the doctor shoot us up with inappropriate remedies to maintain our youth. When an athlete’s body is artificially maintained, the inevitable decline is even worse. Similarly, when we demand to be bailed out of any losses, which are normally produced by a vibrant free-market economy, we guarantee that we will no longer enjoy the benefits of freedom. And the more we try to stave off loss through artificial means, both the severity and the length of the resulting decline will increase.

Is this hyperbole? Consider the sad case of Argentina. In 1900, Argentina was one of the wealthiest countries in the world; it ranked 12th in the world in GDP per capita. In little over a century, Argentina has fallen all the way to 72nd. What happened? The collective will of Argentines turned away from principles that promote prosperity and instead embraced an ongoing series of fascist and socialistic dictators who promised to deliver what is undeliverable—namely, a centrally planned economy that never suffers from declines.

Is Argentina on the road to recovery? Hardly! The current president of Argentina, Cristina Kirchner, recently increased effective taxes on farmers to 75% and limited farm exports. Since a third of the Argentina’s work force is employed in agriculture and half of Argentina’s exports are agricultural, the country is certain to suffer from further devastating declines.

An economy that never suffers from declines is no more possible than a human being that never suffers from a bad mood. In a dualistic world, bad moods and economic declines are inevitable. Both, however, can be “treated” gracefully; and mental and economic health can quickly return. We can learn to recognize thinking patterns that are generated by the ego; we can learn to drop our resulting problematical thinking. This does not require elaborate interventions; it just requires a willingness to do so.

Human beings, due to periodic episodes of collective excessive optimism and misdirected signals caused by Fed policies, create economic cycles. Markets have a self-correcting mechanism, but only if they are allowed to operate. Instead, we are spending enormous amounts of money trying to maintain that which has failed us. In doing so, we postpone our economic recovery and create conditions for even greater declines.

If we demand that we never have bad moods, or that we hike at the same speed in our 50s as we hiked in our 30s, or that we never suffer economic losses, we will choose what is counterproductive. David Whyte in his book The Heart Aroused observes:

It takes tremendous energy to keep up a luminescent front when the interior surface is fading into darkness. In some ways we are constantly preventing our own rebirth into new cycles and greater lives, and instead work twenty-four hours a day keeping a wraithlike image of our former selves alive long after its time has past. This “night of the living dead “syndrome is just as true of an organization as it is of a person.

I know I don’t want to be a “night of the living dead” hiker—a hiker who can no longer enjoy the mountains because he demands that he always gets stronger. But I am afraid we are choosing to have a “night of the living dead” economy—an economy where all failures are outlawed, and as a result, success is nowhere to be found.

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8 Responses to The “Night of the Living Dead” Economy

  1. igli1969 says:

    People’s attitudes about the economy have been shaped by a media that mostly publishes press releases from politicians. Those politicians, eager to be re-elected forever, will take credit for any good thing that happens, especially economic upturns, as they affect the greatest number of potential voters. The downside of this is that those same voters will blame them for economic downturns. Thus, those bad things must be prevented, alleviated, or swept under the rug at all costs. The problem is that few, if any, politicians have any understanding of economic principles other than the Keynesian pabulum they were spoon-fed in college. So they generally end up spraying gasoline on the fire. (And that’s *really* expensive these days!)

    The other problem is that politicians do not mature as they remain in office. Maturity comes from running up against reality and occasionally failing. That failure can bring the maturity of “I’ll do it differently/better next time.” If a politician fails, he’s out of politics. Continuing re-election, to a politician, means he’s doing everything right, and doesn’t need to change anything. Sort of like a teenager that has a bad accident in his parent’s car, but walks away from the wreck uninjured. No blood, no foul, eh? And many parents don’t feel like punishing their wayward children, so they learn nothing from the experience.

    As a people, Americans seem to be loathe to punish our elected officials for their incompetence, or even malfeasance.

    We are *so* screwed.

    Chris C.

  2. Frank v2 says:

    Dr. B.,
    I believe you hit the nail on the head when you say, “An economy that never suffers from declines is no more possible than a human being that never suffers from a bad mood. In a dualistic world, bad moods and economic declines are inevitable. Both, however, can be “treated” gracefully; and mental and economic health can quickly return”. Economic highs and lows are a natural process that has to take place in order for things to correct themselves. We are entering a softening and correction phase, all of which has happened in the past. What I find particularly distressing with this go around is that our politicians are all trying to stop the natural process. Perhaps this has always been the case, but for some reason it feels worse today than I remember in past down turns. The noise reminds me of a plumber trying to fix a bath tub / shower drain that is clogged up. It still drains, but just much more slowly than we would like. So while the shower is still running, the plumber (aka politician) decides that he is going to fix this issue once and for all. So while the public is still taking their shower, the plumber puts a stopper in the drain, and begins to try and unclog the blockage. However, not that the drain plug is in place, the water quickly fills up the tub and inevitably spills over, causing a much worse situation than if the plumber had just left things alone and let the clog work its way out. I know it is painful. And I do feel bad when people are negatively impacted as things are softening. But we are a resilient people, and we can bounce back. But putting in trade restriction or other “fixes” inevitably will extent the pain period, and perhaps set us up for a much bigger fall. I have been told that the recession of the 1930s can never repeat itself and that might be true. Instead what we may end up with is something much worse if we can’t get our politicians to keep their fingers out of the proverbial pot.

  3. James D says:

    This sounds a lot like what we were talking about a couple of weeks ago. I take Dr. B’s athletic example a bit further and look at NFL athletes. When young and strong, they are encouraged to push it all to the limit, to play through the pain. And yeah, they get paid a boat load of money to do it. But they start to age, and their bodies just won’t do what they used to. So in come the steriods and the cortisone shots and the painkillers to get them through one more season, one more game. And in the end, these men are left broken, unable to pick up their grandchildren because of the massive injuries and multiple surgeries, and often broke because they burned up all that money living a high end, unsustainable lifestyle and never foresaw all the bills they’d have do deal with once they stopped playing.
    Our powerhouse economy needs time to rest. None of wants our stocks to go down, but these down periods are a normal part of the cycle we seem to have forgotten still works. Of course those with the vast sums are putting the cash into Washington to get government interference in the market to prevent their losses, seemingly oblivious to the fact that like a cortisone shot to a broken ankle, the end result is actually worse.
    A note on the governmental play. I read an article a few weeks back (can’t remember by who). It was an analysis of companies that donate to campaigns. They often donate huge sums to both sides of the same race. Why? Because it pays off as an investment. No matter who wins, they get key decisions made they way they want them. When government is continually “hired” to serve as interference in the market, you know we’re going to have problems in the end.

  4. Chris Claypoole says:

    Just to pound on politicians a little more, at least two of them are not only immature, they are ignorant of a pretty basic scientific concept, and may be stupid as well.

    http://blogs.chron.com/sciguy/archives/2008/07/is_black_hole_a.html

    In case the link doesn’t work, two Dallas County Commissioners objected to a third commissioner’s use of the term “black hole” to describe an office that habitually lost paperwork. They are demanding an apology for the racially insensitive term. Really.

    At least until the national horse-laugh at their expense gets more attention than their indignation.

    Chris C.

  5. Chris,

    Rose Wilder Lane in her great book The Discovery of Freedom pointed out why we submit collectively to public policies that create poor economies. In her view we then have someone to blame.

    Frank,

    Indeed we may end up with something much worse and our collective chanting the mantra that “it can’t happen again” will do nothing.

    Jim,

    ADM is an example of a company that gives to both parties and as a result we have the disaster of ethanol.

  6. Kevin says:

    Dr. B,

    I’m sure you’ll appreciate this quote from the simple classic by Henry Hazlett’s Economics in One Lesson,

    “The case against government-guaranteed loans and mortgages to private businesses and persons is almost as strong as, though less obvious than, the case against direct government loans and mortgages. The advocates of government-guaranteed mortgages also forget that what is being lent is ultimately real capital, which is limited in supply, and that they are helping identified B at the expense of some unidentified A. Government-guaranteed home mortgages, especially when a negligible down payment or no down payment whatever is required, inevitably mean more bad loans than otherwise. They force the general taxpayer to subsidize the bad risks and to defray the losses. They encourage people to “buy” houses that they cannot really afford. They tend eventually to bring about an oversupply of houses as compared with other things. They temporarily overstimulate building, raise the cost of building for everybody (including the buyers of the homes with the guaranteed mortgages), and may mislead the building industry into an eventually costly overexpansion. In brief in the long run they do not increase overall national production but encourage malinvestment.”

    From the chapter on “Credit Diverts Production” http://jim.com/econ/chap06p2.html

    Did Hazlitt see the pitfalls back in 1946? Looks like we are now reaping the seeds of 70 years of bad economic policy.

  7. Kevin,

    Thanks. It has been many years since I pulled Hazlitt’s classic off my shelf. It is time to do so again!

  8. Kevin says:

    Looks like I put my last comment under the wrong thread. I meant to put in under the Freddie and Fannie post.

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