Monday, October 06, 2008

Who can dig a deeper hole?

I spent the past few days on an excavator, digging (and reburying) some stumps, setting up a pad for a new building and digging a hole for some stone steps.

But, it seems to me, and to the stock market, the powers that be can dig a much deeper hole than I.

Ben Bernanke applauds the recently approved bail-out: I applaud the action taken by the Congress. It demonstrates the government's commitment to do what it takes to support and strengthen our economy. The legislation is a critical step toward stabilizing our financial markets and ensuring an uninterrupted flow of credit to households and businesses.

The Federal Reserve will continue to work closely with the Treasury as it undertakes these new initiatives. We will continue to use all of the powers at our disposal to mitigate credit market disruptions and to foster a strong, vibrant economy.

Perhaps my brains are a bit rattled (occupational hazard of sitting on an excavator) but borrowing an extra 5% of GDP to buy bad debts from the banking sector with the aim of maintaining an uninterrupted flow of credit to households and business (which seems to be the cause of the bad debt problem) is likely to do little to support and strengthen our economy.

While digging, I was thinking about the speed of financial sector consolidation in recent weeks. At the current rate the Fed will soon be able to conduct policy on a 3-way conference call.

The virtue of consolidation- reduction of redundancies- depends on a tried and true business model. Why the financial sector believes consolidation makes sense currently, when the failure of their business model is becoming ever more apparent, is beyond my ability to fathom.

In times past, capitalist competition was viewed through the same lens as evolutionary competition- the fittest would survive. Industry consolidation could, under that head, be seen as a decrease in intra-species diversity which occurs when an organism becomes extremely well adapted to an environment.

So, I wonder, why is the financial sector aiming to decrease diversity when a culling of the financial herd is imminent? Are we breeding bigger dinosaurs just in time for the great extinction?


STS said...

Looks like you're having fun. I've been digging some rather smaller holes in my (rather smaller) yard recently.

The evolutionary metaphor was only applied to economics back in our last Guilded Age when it was used as a simplistic justification for inequality. "We're rich because we're smart." See Herbert Spencer.

About a dozen years ago, Michael Rothschild came out with a nice book promoting a more contemporary biological metaphor for economics.

Here's a question I'd really like your perspective on: given that we've got a self-fueling crisis of confidence in progress, what can stop it? I'm guessing your answer is roughly: "don't just do something, stand there." Meaning that this is just something that has to work itself out because confidence (like trust) has to be earned.

Am I right? Or do you see any constructive role for public policy?