Monday, August 1, 2016

- Too Dumb To Succeed

On a lark, I re-watched that stupid movie by Andrew Ross Sorkin (stupid is as stupid does) about the mortgage crisis, “To Big To Fail”. In it we’re told all about the brave far seeing bureaucrats who managed to ‘save us’ from the greedy bankers, and prevent economic catastrophe. It says nothing of course about the idiots in government who put all the pieces in place to crate the mortgage bond crisis. But it did make me realize something about people.

It’s a complicated story of course. The community reinvestment act made it a requirement that Banks issue loans to more minorities, regardless of their credit score. This gave the banks more risk than they wanted, so they sold off that risk to others who did want the higher returns it might have promised. They bundled them up, got (arguably dumb) insurers to insure them, got (even dumber) credit rating agencies to rate them high because of the insurance, and then convinced others to buy them for top dollar, because of the high ratings.

At the time of the CRA, no one saw this coming. All they saw was a small problem to solve. The government saw the problem as not enough minority home owners, and the banks saw the government solution to the problem, as too much risk. None of the minority buyers with crappy credit should have ever been given a loan in the first place, but the government wanted to make things ‘more fair’, regardless of the cost. Well the inevitable cost was the blowup.

By 2006, well before things fell apart, everyone in my circle knew there was a bubble. I recall a very specific conversation I had with one good friend who was running a $400 million dollar Fixed Income Strategy at the time, and we were amazed at how expensive it was to short the credit and mortgage products that were obviously overpriced. At that time we were all saying “I don’t’ know when (and I’m not 100% sure why) but this is going to blow. The ‘when’ issue was our problem. The fund where we were working at the time had sound risk controls in place so if you sold too early, you could hit your 20% “drawdown from peak” quite quickly and then be out of business. Few were ready to take that risk, and by 2006 we all knew a few people who already had, and lost.

Anyway, the movie follows former Treasury Secretary Hank Paulson as he shows up a day late and dollar short to the crisis which slid from investment bank, to insurer, and inevitably to GE. He bravely reacts to every New York Times headline by first baling out one bad actor (Bear Stearns), then skipping one (Lehman), then bailing out another (IAG), and then finally, partially (and temporarily) nationalizing the country’s largest banks, in at least one case – against their will. All very courageous. It’s amazing how much you can accomplish when you have a gun to everyone’s head isn’t it?

And it’s all a common story from my chair. The government intervenes in a market and breaks it. Smart guys find ways to restore something close to economic order, and when close turns out to be ‘not close enough’, the government finds a way to blame the patient, not the doctor. It’s the same old story that’s been going on from time immemorial. And the thing it got me thinking about, is the idea of fairness and a government imposed ‘level playing field’.

Think about it this way. How would the government ever create a level playing field at anything? Let’s say that for purely political reasons, they decided that there aren’t enough Japanese basketball players. They could require each professional basketball team to hire a minimum number of Japanese players, but what would happen to the game of basketball with all these shorter than average exceptionally polite people running around the court? The obvious answer is that it would suffer. But government doesn’t care about that, they only care about ‘fairness’. The costs of that ‘fairness’ are really the problem of the teams themselves.

You simply cannot mandate talent. You can’t make a shorter than average guy into a professional basketball player. The only way you ever strive for excellence at anything, is if the market is allowed to decide for itself. Unfair to Japanese players you say? Well that’s really on the Japanese. If it’s a priority for one he should find his way there on his talent or be forced to deal with the ‘unfairness of the system’ in some other way. It was the same thing with the banks.

Government has a responsibility to be motivated by real facts, not people’s feelings. The feeling of injustice cannot be a motivator for changes in the law, because if it is, something somewhere is going to break. Reality will have its day. There is no avoiding it simply because you are unhappy about it. It can either be today, in the form of your hurt feelings, or it can be later, when we find out that no one wants to go to a basketball game where the final score is 16 to 12.

Politics cannot turn stupid people into smart ones. And stupid people will always make stupid decisions. That’s the nature of stupidity. You cannot legislate it away. This goes for immigration, or trade, or any other idea that our politicians are hatching to impose ‘fairness’. The only thing that’s really fair is that the smart people will beat the stupid people, so the stupid people will have to try to be smarter. Take away those consequences, and the whole thing falls apart.

1 comment:

MikeCLT said...

I think you could reuse the title to this post for your next post about the Trump campaign.