Crypto Market Commentary
8 April 2020
Doc's Daily Commentary
The 1 April ReadySetLive session with Doc and Mav is listed below.
Mind Of Mav
What Caused The Crisis & How Do We Fix It? Part 3
Yesterday we discussed how Fiscal Policy (used by governments) and Monetary Policy (used by Central Banks) come together to try and stop a crisis before it destroys an economy.
Importantly, we ended by discussing the role of corporations in that equation.
In this day and age, with corporations employing tens or hundreds of thousands of people, they truly are too big to fail — their failure would jeopardize the entire economy and cause even more damage.
We just saw that as airline companies, with little to no contingency plans, were bailed out again by governments around the world. If you are a huge corporation that provides an essential service to a nation, it just makes sense to overleverage yourself during the good times to deliver huge returns, make huge bonuses, and then wait for your friends in the Capital to bail you out during the bad times.
That alone is unsettling, but what I find absolutely appalling, which is that this is now baked into the code of competitive capitalism, is that corporations must abide by this risky behavior or they risk giving an advantage to their rivals.
That’s right. Things have become so warped that if a corporation tries to be more responsible and save cash, they may fall into the trap of being uncompetitive compared to their more reckless rival.
If Delta sees American Airlines issuing more stock buybacks, causing their stock to hit new highs and more investor capital to be thrown their way, you better believe that Delta’s CEO is going to be pressured to pursue the same bad behavior — bad, because it left those companies extremely vulnerable if everyone in the world stopped flying.
And so, bad behavior begets bad behavior — all because of the belief that there is a backstop that will be there to bail them out.
Sure, point the finger at the government for enabling this behavior like some bad parent. But, put yourself in their shoes for a second.
Let’s go back to this ultimatum many corporations are facing — they get assistance, or they go under taking thousands of jobs and millions, if not billions, of potential economic activity with them. What do you do as the government? You’ve got two primary choices:
There’s the hardcore free-market perspective that bailouts are theft, and that these corporations knowingly engaged in bad behavior — why should we be the ones to bail them out? Let them fail! We’ve obviously not seen this response in recent history, so it’s hard to say if society would be better off taking this approach in the long term. Certainly, it would exacerbate the damage already felt, and it would take decades for recovery. Many government (and central bank) powers regarding Fiscal & Monetary policy have been expanded in direct response to the economic damage that can occur with the free-market approach.
In direct response to the Troubled Asset Relief Program (TARP) and the Emergency Economic Stabilization Act of 2008, often called the “bank bailout of 2008,” both of which were signed into law to try and counteract the 2008 crash as it was happening, Representative Ron Paul (R–TX) wrote, “In bailing out failing companies, they are confiscating money from productive members of the economy and giving it to failing ones. By sustaining companies with obsolete or unsustainable business models, the government prevents their resources from being liquidated and made available to other companies that can put them to better, more productive use. An essential element of a healthy free market is that both success and failure must be permitted to happen when they are earned. But instead with a bailout, the rewards are reversed – the proceeds from successful entities are given to failing ones. How this is supposed to be good for our economy is beyond me…. It won’t work. It can’t work…. It is obvious to most Americans that we need to reject corporate cronyism, and allow the natural regulations and incentives of the free market to pick the winners and losers in our economy, not the whims of bureaucrats and politicians.”
Then, there’s the response that governments gave following 2008 — we’ll bail you out, but you better believe you’re paying it back with interest. It’s seen as a net benefit to society as corporations are still providing jobs while also paying back the bailout they took. They even passed sweeping new legislation (Dodd–Frank Wall Street Reform and Consumer Protection Act) in an attempt to prevent such blatant disregard from jeopardizing the entire economic system again.
Ah, but there’s the problem which has led to the issues we’re facing today: Any support of corporations is risky because you better believe that if you show corporations that you will be there to support them through thick and thin, they are going to go right back to taking crazy risks. That will get you back to where you started a decade or so later.
So, what do you do?
Ideally, you’d find a way to find a middle ground between these two extremes. You’d have to find a way to maintain the essential services that these businesses provide while also punishing the shareholders and executives that facilitated this type of reckless behavior. You’d also have to do this without committing political suicide by enacting policies that are “bad for business” — see the ultimate irony here?
Politicians are just as bound to this game of bad behavior that corporations are.
We want to be upset with banks, with corporations, with politicians, with mainstream media, with the government, with the Fed, and with anyone else who have allowed this poorly designed game to play on.
But, we can’t forget that each of these entities are simply playing by the rules of the grand game.
This is known as Moral Hazard, and it’s a vicious underlying force.
So, yes, Central Banks, Governments, and Corporations all caused this crisis in different ways. But, given the choice, I think they’d do it all again because they are so compelled to maintain their own status quo, rather than seeing the inherent flaws of the system.
This is why my hope is that this crisis is painful in the right ways, and lets us examine how to re-engineer this system to be better suited for the collective, long-term needs of all, not the short-term profits of some.
At the end of the day, economic downturns can be scary times for all members of society. People can lose jobs and homes and livelihoods and governments can lose power. There are tools in place to steer an economy — but at the end of the day, no market can be controlled completely; only managed.
All the institutions can do in the midst of this crisis is to try and make the best choices with the tools they have. Using a tool in the wrong way or at the wrong time can have devastating consequences or may be more devastating that doing nothing at all. It’s a true test.
Monetary policy, discretionary spending, taxation — they all do different things to achieve the same result: a good economy that works productively to provide for the wellbeing of the participants within that economy. Ultimately, that’s what we all want, right?
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