Why Was Nothing Done?

This post was originally publishedon my blog at marktomarket.typepad.com.

I’m going to take a minute to do exactly what I have been criticising everyone else for the past few days, which is be a Monday morning quarterback. It seems that I am the only one in the worldapparently who has even dared to play devil’s advocate with those vehemently criticising the government’s bailout of the financial markets. Let me reiterate that I am not completely for the bailout (I don’t want to see the government intervene in the financial markets any more than anyone else does), but I’m either really open-minded or really naive to look at the ‘other’ side of things, specifically the cost of not taking action.

But, in this discussion, many people have been talking about why this crisis has developed and why nothing was done by both private agents and government regulators. I think this is a legitimate question, albeit not one that is going to do anything for our markets in the short-run (e.g., immediate term).

I have been asked, though, who I blame and who should be held responsible for this mess. Well, my answer is simple and perhaps a little too simplistic, but I think it is all of us. It’s the managers of the firms who allowed poorly managed debt to get out of control; it’s the government regulators who, despite much advising that such a crisis could hit, failed to enforce existing regulations; and, it’s the consumer that reveled in a thriving economy ignoring the foresight of the bell curve’s gravity effect (i.e., what goes up will inevitably come down, because the economy is cyclical after all).

So, our ‘seven fat years’ were great. We all became very fat (figuratively and literally, I guess) and happy. We filled our pockets with short-term funds (i.e., credit); we filled our homes with plasma televisions; we filled our tanks with gas; we filled government programmes with pork; we filled pork with high-quality feed; we filled children with too much food; we filled politics with too many children.

The more important point here is what we did not fill. We did not fill the barns, bins, holding tanks, silos or storage facilities. Simply put, we did not take the ‘seven fat years’ to prepare for the ‘lean years.’ Net saving in the US since 2000 has declined from roughly 2.5% to less than .5%, which is comparitively lower than EU and G7 countries. So now, we’re sitting here talking about who caused this and why this happened, all the while criticising the efforts to fix it with Armageddon-style gloom and doom tactics, or at least that’s how some look at the bailout.

I guess what I am saying here is that I understand the frustration here, trust me, I do. Moreover, I see both sides of the argument, perhaps for the first time in my life. On the one hand, we have a crisis that is brewing and without taking timely and decisive action, the repercussions could be overwhelmingly significant; while, on the other side of the fence, we know that the potential harm that could come from unnecessary intervention could also have drastic destabilizing effects on the long-term efficacy of the economy. Needless to say, it’s a tough one, which of course, is the understatement of our lifetime.

So, I have no lasting recommendations, but don’t kid yourself, because you don’t either. We can all continue to be Monday morning quarterbacks or we can take the action that is best for the results of the economy in a timely and decisive manner. It seems everyone has suggestions or a response to the proposed plan, but in reality, we’re all speaking from the arm of our chair.

There are many people more qualified than I to speak to the efficacy of the plan and make rational suggestions that the government and the markets would be foolish to refuse. However, it is what it is, and we can either talk in circles or move on.