Point of No Return

Recently, I set my Facebook status to “Scott thinks our financial system has reached a point of no return.” A friend wrote me the following email.

So what do you mean by our financial system has reached a point of no return? What do you think can be done? Just curious. I am not very educated on political things, but I would like to know your thoughts.

I wanted to offer my perspective, but quickly realized I would have to be thorough in my response. Below is my lengthy answer. Caveat: By no means, would I consider myself a trained economist. I’m sure others have greater insight into these things. These are just my opinions. I could probably stand to be educated a bit more. By “point of no return”, I think I mean 2 different things. 1. We’re setting bad precedents. Politically, we (and by we, I mean those in our gov’t) are making bad decisions that are setting bad precedents for our future. Many of the programs of the “New Deal” that were set in place during the Depression were intended to be short lived programs. Some of the programs were designed as permanent reforms, but many of them were simply designed as course correcting measures. Unfortunately, those programs designed to get us out of the Depression became institutions of our financial and political worlds and still exist today (70 years later). The recent bout of government bailouts for private corporations might be a somewhat logical temporary fix to help us keep our heads above water, but if our own history is any indicator, these temporary fixes will end up as permanent fixtures of our system. There’s a joke in the church that kind of relates to this idea. It’s said that any new church event that’s halfway successful automatically becomes the “First Annual” event. Meaning, if it worked once, why stop? So, I believe that we’re setting into place a fix that will ultimately become a “right” in the future. What happens in 1 year, 5 years, or 30 years from now, when corporations get themselves into trouble? Won’t they cite the events of today and say, “You bailed them out, why not us?!” 2. The damage has already happened. I think the damage inflicted upon our economy by foolish investments is so deep, reaching the highest levels of our financial system, that the repercussions cannot be abated. We can throw money at the problem, but that will only treat some of the symptoms, not cure the disease. Grievous errors have been made and someone (we) will have to pay for it. Our leaders may try to patch things with temporary fixes and then paint the turd gold by claiming how they helped us “avert disaster.” But whether we suffer in the short term with a full blown recession/depression, or suffer in the long term with higher tax burdens, greater national debt, more centralized government, and fewer liberties, the truth is clear: we will suffer for our mistakes. As for the what can be done: I’m not sure what the best answer would be, but I know several things for certain. 1. To quote my friend Andrew, “Lack of oversight is not the answer to a problem caused by lack of oversight.” Unbridled power is not a solution. This article will make you shiver: http://money.cnn.com/2008/09/20/news/economy/treasury_proposal/index.htm?postversion=2008092011 2. We should not operate under the assumptions of privatized profits and socialized losses. This cross breed of capitalism and socialism will only benefit the rich and powerful. This article has a really good podcast: http://www.npr.org/templates/story/story.php?storyId=94686428 3. Don’t panic. Despite the grim outlook. The key to a positive economy is our attitude. If everyone (or even some of us) begin to panic and pull everything out of the system, we’ll certainly whip ourselves into a frenzy. I don’t mean to instruct everyone to just relax and get blindsided by a coming storm, but simply to temper our natural tendencies to panic.