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Banbury Cross

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Post details: Me First

Me First

Individual pursuit of happiness has been the driving force of progress as well as the unstoppable engine of capitalism for several centuries now. But sometimes our appetite for immediate personal satisfaction has to take a back seat to a wider set of considerations. Sometimes our own narrow set of goals has to be synchronized with the rest of the society.

The USA and most of the developed world have a serious problem.

Imagine five people gathered around a table to divide profits from their business endeavors. Each participant was promised a share of $30 dollars, but somehow due to unforeseen circumstances there are only $100 lying on the table, instead of the anticipated $150. The partners are sitting nervously on their wooden chairs, biting their nails and pondering how to deal with the situation. There are essentially two ways.

First, the most brazen guy can step up to the plate and say something like this: "Well, guys, as we all know I was made an explicit promise for $30 so if you don't mind I am taking my cut off the table - no one has any problems with it right? - and y'all just take care of the rest. I am sure you can split it fairly. Buh-bye!" So that's one way. Another possibility is to calmly assess the situation, try to ascertain every person's fair share and split the pile of money anew according to mutually agreed upon rules.

Now back to reality. Over the past decades many aspects of our national wealth creation mechanism have gotten seriously out of whack. Our debt has risen to unsustainable levels, highly qualified and well paying jobs were outsourced and are no longer available, many pension funds were based on unrealistic assumptions and are significantly undercapitalized, banks have not followed proper rules of accounting, thus greatly inflating their reserve assets, unproductive parts of the economy grew out of proportion, public unions were made exaggerated promises by local politicians, who in turn recycled their votes for easy reelection. As a result we are all collectively expecting a bit more than what we actually have. There are too many competing liens against our pot of gold. How we deal with them will say a lot about us when history comes around for the final judgment.

One would expect that a sincere nationwide discourse about managing our resources would be instigated under such circumstances. Social utility of whole economic sectors may need to be reevaluated, cash flows of the global trade inspected. Fortunately there are visionaries who have their own original ideas how to solve this conundrum. In their view the Wild West approach will do just fine.

Enter Charles Munger, the billionaire vice chairman of the Berkshire Hathaway Inc and Warren Buffet's second in command. During his recent speech at the University of Michigan, he told students that we should "thank God" for all the bailouts of the financial sector, while adding at the same breath that we cannot keep doing this indefinitely and that people in economic distress should just "suck it in and cope."

Lovely, isn't it? Now that all the paunchy captains of the industry have been saved and are comfortably seated on their cushioned benches, no more life boats are to leave the deck of Titanic. Women and children can just suck it in and cope.

Here is how Mr. Munger elaborated on this theme: "if you talk about bailouts for everybody else, there comes a place where if you just start bailing out all the individuals instead of telling them to adapt, the culture dies". Hmmmm. I wonder what culture could Mr. Munger possibly have in mind? Did he mean the "Me First" culture of Wall Street that was practiced by the Too Big To Fail institutions? Yeah, the ones that have only gotten Too Bigger To Fail over the past 18 months. Or did he mean the culture of double speak and circuitous logic, as preached by the choir of Wall Street's overzealous apologists (Christopher Dodd, Tim Geithner, Hank Paulson, Larry Summers etc)? If this is the culture Mr. Munger wants saved for eternity, I'd say let's call the nearest taxidermist and put that culture on his wall.

Don't get me wrong. We need a financial system, so some triage was necessary. But we need a sound one. The system whose purpose is linking free capital with entrepreneurial ideas. Not the one linking preposterous leverage with poorly understood macroeconomic conditions, the one where economy ends up being a hostage to a bunch of berserk gamblers. When their beloved casino burned down, those clever foxes slipped their gambling losses in between the insurance claims and we never even noticed.

Yes, we needed to save our banks, but before that happened, we should have inflicted a royal pain on our financial aristocracy - bondholders, shareholders and all those who profited from the monumental Ponzi scheme. We should have levied criminal charges and clawed back some of the astronomical bonuses doled out to the incompetent (if not outright fraudulent) tycoons. Not only would it teach a valuable lesson on how capitalism works, but it would also ease the subsequent burden on the US taxpayers.

But that is all water under the bridge now. Some milk has been spilled, but much has fortunately remained on the table. We are still standing tall, our economy is largely functional, our research and development best in the world and our labor force well trained, educated and eager to work hard. But several things have to change relatively fast. First, we need clear and frank assessment of our overall fiscal health and admission that the current policies are not viable. A serious discussion should ensue about our priorities and the levels of pain we are all willing to endure in order to set things straight. Housing market, our military adventures, Medicaid and Medicare have to be supported by our export power, not by murky machinations of the Federal Reserve or Fannie and Freddie. All this has to be resolved in a transparent manner so that everyone sees that the burden distribution is not lopsided. It won't be an entirely pleasant discussion, but it will be cathartic at the end.

Otherwise we risk that whatever is left of our common pie will be hijacked by the least scrupulous character at the table: the bankster.

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