“Do something” is fast-becoming the recurring whine of most financial market commentary. In fact, “Do something” is fast- becoming the recurring whine of almost all socio-economic expression in the Western World.
From the rioters in Greece, to the Occupiers on Wall Street, to the long-term unemployed of America’s big cities, to the underwater homeowners of America’s small towns to the heavily indebted college grads nationwide; the desperate citizens of the Western World are turning to their governments and shouting, “Do something!”
Reacting to these pleas, the governments are attempting to do something, even though doing something is what brought us to this lamentable situation in the first place. In general, governments are attempting to overturn the eternal relationship between risk and reward. They are attempting to salve every economic wound, especially those that are self-inflicted.
A little bit of government-sponsored triage might be okay, perhaps even helpful. Unemployment insurance, for example, might fall into that category. But when the government begins mobilizing monetary M.A.S.H. units to rescue the bankers and/or governments who blew themselves apart by holding campfires in a munitions depot, the rescue effort has gone too far…way too far.
Traditionally, capitalistic societies regarded failure as an unfortunate, but normal, part of the economic process. Therefore, capitalistic societies would routinely ignore most victims of the capitalistic process, even innocent, collateral victims. The process was Darwinian, but very effective in sustaining long-term economic growth. So the modern idea of funneling taxpayer dollars to entities or individuals whose incompetence deserved failure would have been unthinkable…even anathema!
But today, the ancient idea of allowing capitalism to determine winners and losers, rather than the government, is equally unthinkable…and anathema!
As a consequence, every taxpayer in the West is in the failure- subsidy business, and every failing institution and struggling individual is in the begging business. Ironically, therefore, both self-determination and self-reliance have perished by the same sword.
The governments of the West have come to see themselves as a financial Army Corps of Engineers — overpowering the course of nature with brute force. They respond to short-term crises with powerful, overly engineered “solutions,” without ever really considering the long-term harm these solutions may produce. Sure, the river doesn’t flood when you transform every oxbow into a concrete storm drain. But diverting nutrient-rich silt away from farmland and into the sea is not exactly progress.
Nevertheless, governments throughout the West continue building their storm drains. They continue to divert essential nutrients away from the private sector and pour them into a bottomless sea of bankrupt governments and failing too-big-to-fail enterprises. In other words, the governments of the West continue to “do more,” when “less” would work just fine.
The biggest problem with doing more is that it invites all citizens to do less.
Both the rich and poor learn to reach for a handout. The politically connected elite beseech the government’s assistance as furtively as the dispossessed ranks of the unemployed. Just ask Goldman’s Lloyd Blankfein or JP Morgan’s Jamie Dimon or GM’s Rick Wagoner or any of the other CEOs who trekked to Washington during the 2008 crisis to beg for a handout from Uncle Sam.
Or ask Charlie Munger, Vice Chairman of Berkshire Hathaway.
While his sidekick, Warren Buffett, is busy making headlines — and fanning the flames of class warfare — by “complaining” that his taxes are too low, Charlie, as well as Warren, is continuously advocating government intercession in places where intercession could add billions more to his net worth (and Warren’s).
Just yesterday, Munger was urging the governments of Europe to “do more.”
“They are way behind the curve,” said the folksy billionaire. “They have to stop shooting at this elephant with a pea shooter.”
Really, Charlie? Why is that? Do the governments of Europe have to do more because capitalism would fail without their wise, guiding hand? Or do the governments of Europe have to do more to rescue a few “at risk” portions of Berkshire’s investment portfolio?
In an earlier, simpler time, when Berkshire Hathaway was not holding large euro exposure and was not shorting naked put options on the Emerging Markets, Munger and Buffett would routinely advocate “small government.”
Said Buffet: I think the most important factor in getting out of the recession actually is just the regenerative capacity of American capitalism.
Said Munger: The smart way to regulate is to act like a referee. You have to curtail the activities that are permitted. There should be less trying to fix things and more trying to prevent bad outcomes.
So why not resume trusting “the regenerative capacity of American capitalism” and stop “trying to fix things?”
Even if Berkshire Hathaway holds very large positions that would suffer very large losses in the event of a severe euro crisis, is it the responsibility of government to make those bad bets good?
Aren’t Warren Buffett and Charlie Munger the quintessential American capitalists? Didn’t they make tens of billions of dollars betting on the lightly regulated American enterprises of the ’60s, ’70s and ’80s?
So if “small government” enabled these two billionaires to make their billions, why would “big government” be desirable today? Doesn’t the next generation of capitalists deserve the same relatively fair, honest and lightly regulated environment that enabled Buffett and Munger to make their billions?
Or to put it another way, don’t Buffett and Munger deserve the opportunity to lose some of their billions in the exact same manner in which they made them? Don’t they deserve to lose billions from making bad bets, just like they made billions by making good bets?
So whatever the configuration of Berkshire’s investment portfolio, the rules of the game need not change. Which brings us back to Munger’s remark about shooting an elephant with a pea shooter…
A certain girl in my 10th grade French class sometimes wore a certain dress that made it slightly more challenging for her male classmates to focus on conjugating “aller” and “avoir” (but much easier to conjugate “aimer”). The dress had a phrase on it that became shorter and shorter — by one word each time — as it worked its way down her dress. The phrase went like this:
Oh please don’t touch me there!
Oh please don’t touch me!
Oh please don’t touch!
Oh please don’t!
I didn’t learn a whole lot of French in that classroom — teacher’s fault, not the dress — but I did learn a little something about the power of the written word…and of the word that is not written.
So if we play a similar game with Munger’s phrase about en elephant and a pea shooter, we end up with the comment that the enterprising, capitalistic Munger of decades ago might have made…rather than the one he actually made:
They have to stop shooting at this elephant with a pea shooter
They have to stop shooting at this elephant with a pea
They have to stop shooting at this elephant
They have to stop shooting
They have to stop
That’s right, Charlie. They have to stop.
If Western capitalism is to resume flourishing, Western governments have to stop. Stop their meddling; stop their fixing; stop their rescuing; stop their storm-drain building.
Let the floodwaters flow. That’s what makes the grain grow.
for Markets and Money
Editor’s Note: Eric J. Fry, Agora Financial’s Editorial Director, has been a specialist in international equities for nearly two decades. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short-selling. Following his successes in professional money management, Mr. Fry joined the Wall Street-based publishing operations of James Grant, editor of the prestigious Grant’s Interest Rate Observer.