The fixes are more costly than the problems.
“Systems of problem solving develop greater complexity and higher costs over long periods… the destructive potential is evident in historical cases where increased expenditures on socioeconomic complexity reached diminishing returns, and ultimately, in some instances, negative returns…where [the system] starts to become vulnerable to collapse”
Joseph Tainter – The Collapse of Complex Societies
We have ridiculed bailouts. We have railed against them. It did not seem fair to pay off bankers with the sweat of labor’s brow. With privilege comes responsibility. It was the privilege of the banker to stay at the Four Seasons while lending someone else’s money to the Greeks. His bet failed. Now, it is his responsibility to take his beating like a man.
But today, we appeal neither to the dear reader’s sense of humor nor to his sense of justice. We appeal to his sense of futility. As W. C. Fields put it: ‘If at first you don’t succeed, try, again. Then give up. No sense in being a damned fool about it.’
Little appreciated in the economic literature are the benefits of giving up and letting things collapse. This is a pity. While successful fixes are celebrated, it is to the failed fixes that we owe much of our contentment and our progress.
Joseph Tainter explains, for example, that while the first fix may be beneficial, later ones often produce negative returns. Then, you’re better off letting the whole system collapse. By examining ancient human bones, for example, he reports that nutritional levels actually improved, for most people, after the collapse of the Roman Empire.
But the financial history of the last 20 years is a story of one successful fix after another, each grander than the last. The Asian debt crisis and the LTCM crisis were solved at trivial cost. But, trailing each solution, like shame following indiscretion, was a new problem. Two years after the Asian crisis came the dot.com blow-up. Then, the cause of the problem of sub-prime debt in 2007 was the solution to the problem of the post dot-com debt-driven recession of 2001. Bailing out the US economy with low interest rates begat a bubble in housing. Within 5 years, banks all over the world found themselves with too much mortgage debt and too little assurance of getting paid back. This problem was solved by the bank bailouts of 2008-2009. The bailout of Bear Stearns cost $29 billion. The TARP program cost more than $700 billion.
Soon after, bad bets in the banking sector became bad debts in the public sector. Now, the bailers themselves are sinking. In particular, Europe’s seaside states are taking on water. This led to the biggest bailout ever –Euro-TARP – at a cost of $1 trillion.
As yet little noticed by investors is the gaping hole in America’s hull. James Davidson reports that while the Greeks need to raise an amount equal to more than 20% of their GDP this year, the US funding requirement is more than 32% — more than any of Europe’s storm toss’d states.
Each story has its unique twists. But the outcome is always the same: the world’s total debt increases every time. And now, the returns on solutions are negative.
Bob Janjuah, chief strategist at RBS, sees where this leads:
“We are trapped in some horrendous Keynesian/monetarist nightmare, where policymakers, aided/abetted/advised by their buddies in the media, in the lobbyist cabal and in financial system, have YET AGAIN decided to go down the route which merely delays the problem/pushes it down the road, but which virtually guarantees that when the NEXT bubble collapses…there is NO pleasant way back.”
With so many frightful successes we wonder if it isn’t time to give up. So, we look south of the Rio de la Plata for inspiration. When it comes to financial failure, Argentina is a model of success. In 2001, instead of getting a successful bailout, it collapsed — defaulting on nearly $100 billion of debt, the largest default ever.
Judging from a recent visit, the world did not come to an end. People took the streets, beat on pots and pans, and lost 2/3rds of their savings. By some accounts, the middle class was virtually wiped out. But life went on. And today, life in Buenos Aires seems about as agreeable as ever.
And last week, Argentina celebrated a happy milestone. The country gave its creditors a last chance to re-coup some of their losses. They could swap their old Argentine paper for new Argentine paper – and recover about 30 cents on the dollar. Take it or leave, said the Kirschner government. Apparently, enough creditors took the offer to permit the nation to re-enter the global debt markets, we will know for sure in a few days. Soon, the Argentines may be able to repeat their mistakes.
Compared to the bailouts, the Argentines’ failed fix looks more and more like a success.
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