To Fail or Not to Fail?

30Sep08

It seems as if everyone is talking, writing, or blogging about the recent activity in the financial markets lately – so not to be outdone, here’s another opinion piece:

 

The wide and diverse opinions on this market meltdown can be tied to the varying degrees in which individuals are being affected. In other words, people who might otherwise say something blunt and logical about this mess are prone to saying something else because of the way that it may hurt them.

 

To get to the bottom of this (and every other) problem the first thing required is some honest evaluation. To make that easier, let’s boil it down to just a little slice of the pie like say, a web design firm

 

What if the firm performed a lousy service? What if they routinely ignored their clients, gave second-rate service, and kept their collective eye not on the ball but only on the dollar bill? That’s easy: the firm would likely fail, and furthermore, they would deserve to.

 

So what’s so good about that? Well, across town in Scottsdale is another firm. Hint: it’s DirectClarity, LLC.

 

We run what we believe to be a very sincere, honest, and caring firm. We spend as much time with our clients as possible; we give them advice based not on what would first benefit us, but rather on what would benefit them in the long run.

 

By trickle-down theory this honest and caring approach is actually the best vehicle for growing a business, so you might say we are scholars of a “best of both worlds” policy when it comes to our clients. Simply stated, we try to always place our clients’ well being above our own desires. This basic recipe makes for happy clients, and a happy company.

 

So how does this figure in with the markets? Well, we have what is known as a “free market” (capitalism) in the US. What that means, in its purest form, is that the consumer (read: you) polices the market. Much like the example above, firms that do what the people want will survive and firms that do not will fail. It’s pretty much the same mentality as why you choose to eat at one restaurant over another; why you visit this clothing store and not that one; why you pick this service and ignore that one over there.

 

The free market also benefits by way of offering the consumer choice, because sometimes different is not always bad. But bad is almost always bad, and in order for all of this to work right, the people must always be able to decide the fate of business by voting with their wallets.

 

That last point is the key reason why the markets are a mess today. If regulations are introduced to artificially sustain ventures that free market principles would definitely send to the recycle bin, then we will have prevented the one critical ingredient that makes this system work: Failure.

 

To make a long story short, there have been some measures in play for quite some time now that have been slowly eroding the inner-workings of the market- one of these measures started out based on a good idea in late 1977 when the first form of the CRA (Consumer Reinvestment Act) was adopted. Its purpose was a noble one: Make sure that banks never discriminate in lending.

 

Unfortunately, this once good idea was abused in future “upgrades” which caused the free market to turn away from the aforementioned consumer-motivated principal and start running to the beat of a different drum called forced fairness. Banks began to lend money in order to meet CRA guidelines instead of loaning based on the likelihood of consumer repayment.

 

This contributed to a chain reaction over time that has prevented this critical ingredient called failure. And when ventures that would normally fail are kept from doing so artificially, then the free market can no longer self-clean. Nor can it operate in the interests of the consumer because it is no longer policed by the consumer. It becomes stagnant and heavy, and eventually it just totally tanks with very little outward warning.

 

That leaves us with the title of this article: To Fail or Not to Fail? Do we let the market cleanse itself and return to normal by allowing it to fail where it has been thus far kept alive by artificial means? Some stay that to step back and allow failure would hurt an untold amount of people and businesses; that it could have far reaching impacts as-yet unknown throughout the world’s financial engines.

 

Or, do we add more life-saving measures? Wouldn’t this just prolong the inevitable? To reach that answer we have only the past to study for clues. If artificial stability has only lead to instability in a given amount of time then it would seem that we have our answer.

 

So, to fail or not to fail…that is today’s question. What say you?

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