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February 08, 2009

Bankers and Oak Trees

From the POV of longleaf pines, oak trees are weeds – vicious competitors. Original stands of longleaf pine have charred bark from the many fires they've survived and there are no mature oaks among the pine. Seems that the oaks burn up in the periodic blazes which pine forests are particularly prone to and which pine trees can survive. The fires also decimate the insects in the lower bark of the pines.

Florida, where we've been hiking through the swamps and forests of the panhandle, now recognizes that the former policy of zero toleration for forest fires was destroying the remaining stands of longleaf pine because the unburned oaks were taking over. Now there is a policy of controlled burns – not sure what the long term unintended consequences of that will be but seems to be better for now than no burns.

When the Fed forcibly prevented recession by super-charging the money supply following the dotcom meltdown and 9/11, we created an environment in which parasitic portions of the financial industry grew like kudzu. Many of the rest of us jumped in by grabbing all the credit we could get and "investing" in over-priced assets. Leveraged buyout firms sucked the equity out of businesses and replaced it with debt; second mortgages did the same thing for housing. Ponzi schemes flourished. State and local governments spent booming revenue on ever more dubious programs.

The long-postponed recession hit with savage fury, fueled by the under and over growth that had gone too long unburned. The lesson from the pine forest is that we don't want to stop all of the destruction, just mitigate the damage to people the best we can. We do want to deleverage; we do want houses to become affordable because their purchase prices are affordable, not because teaser rates on mortgages are available. We do want businesses to live with less credit and more creativity. We do want to burn away the ravenous super-structure of finance with its inflated salaries and unnecessary financial products. We do want government to cut back where it isn't effective; we don't want Congress to continue buying our votes with our money through earmarks.

So parts of the stimulus package are fine; extended unemployment benefits, for example, or spending on counter-cyclical job creating projects (if they're both needed and can really be done quickly). There will be more people on Medicaid. With a little more stretch you can justify tax cuts for those with the lowest incomes; that does get money moving and help counteract the panic that has cash frozen in virtual mattresses. These measures are the equivalent of evacuation from a fire zone.

We DON'T want to preserve the financial industry in its current overgrown form. Sure we need banks; but we don't need TARP to keep them all alive. TARP installment 1.0 was sold on the premise that we'd collapse without more lending. We didn't get more lending; we're still alive although hurting. Now TARP 2.0 promises more lending through more accountability (even though that isn't in the law). But in a contracting economy businesses don't need to borrow for expansion; we don't need loans to help us flip real estate; cheaper houses mean less demand for home credit. We're not going to go back in debt up to our eyeballs for the sake of short-term economy. We're replacing our cars less often. So we can do without so many banks. Let them go.

We DON'T want home prices to surge back up. The Republican plan for a homebuyer tax credit is somehow supposed to both drive home prices up AND make it easier for people to buy homes. It obviously can't do both. Home prices'll stabilize when the fire finishes burning through and buyers aren't still waiting for yet one more government program.

Fires and recessions happen. You can postpone them but you eventually pay the price. You can mitigate some of the damage. But excesses still need to be burned away.

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