Survival Of The Fittest?
Here is an excerpt from my next book taken from the Introduction chapter which I wrote about a year ago;
Recessions are the modern method that Mother Nature uses to balance power in the economy just as She has been doing in nature for thousands of years.
During a shoot for a nature program during my film years, our crew witnessed a hapless creature stuck on the bank of a muddy river, unable to climb up to safety as the water rose. Its doom was obvious and we wanted to help it. But the nature guide in our group advised us against it claiming that it was nature “doing its thing” so that the fittest survived. Helping it would have been an unnatural event that would have undesired consequences in the balance of nature.
Recessions are no different. Weak companies will fail and fall while new and stronger ones emerge. Ordinary and underperforming employees will lose their jobs so that better and more deserving ones get opportunities. Out of the ashes of failure from recessions past, new successful individuals always emerge. The millionaires of today are the product of yesteryear’s recessions. Such is the nature of the economic world we live in today where, like in nature, the fittest survive.
As cold as that sounds, it does go on to justify and illustrate examples from the past and how such events shaped the economy to what it is today … and thus, the mess we’re in as a result of previously messing up “nature’s plan”.
The market, contrary to common belief, is a living breathing thing made up of millions of lives that keep the pulse of the economic world thumping. No one should be allowed to obstruct the “nature” of this pulse and to do so would be akin to saving the hapless creature. No one should be permitted to alter the “natural” plan and to do so would be to upset the balance of the market.
And it is as if we didn’t learn from our past that we’re making the same mistakes again right now;
Back in 1994, a spectacular new form of hedge fund was born in the form of Long-Term Capital Management (LTCM). The high-leverage structure of the fund saw it reap 40% annualized returns but it failed miserably during the 1997 (AFC) and 1998 (Russian FC) downturn and lost in excess of $4.5 billion in under 4 months. Today, it stands as a memorial of the high risk potential of high-return hedge funds.
To make a bad situation worse, banks and investment firms started bailing out the ailing LTCM under the supervision (and some say encouragement) of the Federal Reserve Bank of New York. Even Berkshire Hathaway got in on the action but was rejected for a Fed-organized bailout to the tune of $3.6 billion by major creditors in an attempt to foil a wider spread collapse of the financial industry.
The fund folded in 2000 in spite of all the attempts to save it.
Ironic then, if you consider that some of the names involved with that failed bailout are now making the same mistakes today;
~ Tim Geithner – Former New York Fed Reserve Chairman (Now Treasury Secretary)
~ Larry Summers – Former Secretary of the Treasury under Clinton (Now Chief Economic Adviser)
In my Christmas Gathering, I shared my wishes for the economy and amongst those many wishes I made to Santa was this one;
Posted by Conrad on December 17, 2008
1. Uncle Ben to stop bailing & stimulating
In fact, it was my very first wish in a long list of wishes. (“Uncle Ben” was not a literal finger-point, rather, it was my way of implying the U.S. Government.) My forecasted target for that was to be in the second quarter of 2009 with a view to a market bottom by the last quarter of the year. Looks like I might have to revise that date … to a later timeframe because they won’t stop bailing.
Even before that Christmas Gathering, I had been telling my students from various preceding batches that companies will fail and should be allowed to fail if they are not self-sustainable and solvent during recessions. This is a normal progression – older weaker companies will fade and retire as newer and more dynamic companies fill the void. In nature, this progression assures the herd of strong and competent leadership and ensures that the herd survives to breed the next generation of leaders.
One can also argue that it is a healthy way to spread the wealth instead of letting already-rich old dogs to still have their day. It is obvious that the way we do business today at the speed we convert ideas into fortunes is the playing field of younger, stronger, faster and more vibrant youths. So let the new and the young plant their seeds for the future. Let the old and dying pass on in glory while they still have it. Why extend or prolong the agony for an ignominious death?
If my crew and I had saved that hapless creature, it would have been akin to us playing God in Nature’s scheme of things. The only outcome for that creature thereafter, would be a slight extension of its life of solitude, hunger and a prolonged death. This is because the herd had already moved on a day earlier, having waited in vain for the weakening, ill-fated creature.
Therefore, it wouldn’t be wrong to say that the continuing efforts to bail out ailing American companies are only stalling their inevitable deaths while selfishly keeping the whole world (the herd) waiting in vain and in pain. Let’s not assume who is playing the Godly role in this mess but we can see its similarities to the 1998 LTCM debacle. Even the players are the same.
Interesting point to note; After “recovering” from the AFC and RFC by 1999/2000, the market spun down into the 2001/2003 recession where bigger mistakes were made (Read: Alan Greenspan and the disappearing 30 Year Bond on 31 October 2001), where more cracks in the financial system were revealed and quickly sealed, which set the tone for today’s capitulation.
But that’s another topic for another day. Comments, anyone?
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