Jim Rogers was George Soros' partner in the Quantum Fund. At the time both were contrarian strategists who returned 4200% investment gains to their investors over the ten years from 1970 to 1980 (against the 47% nominal gains and actual dramatic losses of the S&P 500 Index during that same superinflationary period).
Both are now critical of present US financial policy on the part of both government agencies and the Federal Reserve Board (which, though it works hand-in-glove with government, is technically a non-governmental entity).
In order to grasp our present reality, it is necessary to engage in a continuous process of "rearranging our mental furniture" (a phrase I learned though Ivan Illich).
Today, Jim Rogers helped me to do a little more such mental home redecorating through sharing his thoughts in an April 8, 2008 interview with Keith Fitz-Gerald (I'll get back to this right away!).
Along with many fiscal conservatives, I have argued that the painful process of "creative destruction" (a phrase applied for the first time in economics by Joseph Schumpeter), which characterizes only capitalism among all the economic systems, is paradoxically perhaps its greatest strength, as no other financial system is capable of dismantling financial entities that do not work.
Capitalism achieves this creative destruction chiefly during unwelcome but necessary periods of recession. Almost everyone is nominally opposed to financial recessions as they cause real pain to citizens through loss of employment, declines in incomes, and of course through personal and corporate bankruptcy or business failure.
Many have argued, Jim Rogers among them, that the primary mistake of Federal Reserve and government planners in the US at this time has been their unwillingness to allow the core "Wall Street" financial services firms (think commercial banks, investment banks, hedge funds, arbitrageurs, corporate "raiders," etc.) to fail when they make bad or unfortunately timed financial decisions.
Among many thoughtful concepts voiced by Mr. Rogers in his recent interview with Mr. Fitz-Gerald was this hidden gem: "It will cost more to try to prevent a recession than to have a recession."
Now that is an interesting idea that should not be read past too quickly!
What is Mr. Rogers saying?
Mr. Rogers does not voice this directly, but I think I am representing him correctly by suggesting that the ongoing process of enabling bad financial behaviour by rescuing its perpetrators is at the heart of our current economic crisis.
Rescuing the highly self-interested perpetrators of financial recklessness will prove costly in many ways - by enabling the irresponsible to remain in the financial game longer, by devaluing the dollar, by ballooning the international debt position of the US, and ultimately, by discrediting the US as an economic power.
If I am interpreting Mr. Rogers accurately, it would then be cheaper just to have the recession and to allow it - as much as possible in our present highly distorted financial environment - to pursue its natural course.
Every previous recession has had one certain outcome. Those who have survived it, both personally and at the corporate level, have grown leaner, more efficient, and more productive - in a word, better (if not perhaps also more chagrined).
That's how capitalism works, as "the worst economic system of all, except for all the others." It keeps us honest and on-task, and of course, that is often uncomfortable. It goes against our grain to be tested and retested in the marketplace, but that's the harsh truth of what capitalism does. And those who get better at meeting the needs of their customers survive. It's really that simple.
Only capitalism (unhindered by excessive interventionism) is capable of delivering the necessary negative feedback that keeps businesses on the course of accountability to their customers, by delivering what customers at all levels actually want - versus what someone else (usually in government, or too far removed in the upper corporate echelons) has decided that they "should" want.
Capitalism is in fact the only economic system that addresses itself to what customers - citizens in fact - actually want. Every other economic system attempts to determine what its participants need, or to guess what they want, and then to design it for them, through some kind of beneficially-intended central planning system. It sounds great, but it literally never works. And this is where the US now seems to be headed.
In the present American example, it has turned out that there are no customers for the renewable portions of repackaged subprime debt. The US government has determined that somebody "should" want this low-quality debt, since the investment banks wanted to sell it, and they are in trouble if there are no takers. So, representing the taxpayer, the Federal Reserve has stepped forward and basically stated, "Here, we'll act in place of your customers - who should have wanted this but didn't - and buy that from you. We'll hold it as security on your behalf, and we'll give you real money based on this premise. We'll hold the bag, on behalf of American taxpayers."
And... if you think only governments are this crazy, then keep on reading....
A poignant illustration of how such misdirection can occur at the corporate level when enterprises try to move ahead of their customers by deciding what their customers want - on their behalf - is available in an AOL executive's recent decision to improve AOL's search engine by making it "more like Google's." Customer traffic collapsed, because AOL's search visitors were looking for something that Google didn't offer them. Bill Conerly tells the story well.
Our present "codependent" rescuing behaviour is exactly what is preventing this desirable outcome (customers - citizens - using the economic system to get what they want) from unfolding.
What in particular do citizens want that the present system is unable to offer them?
If you've read enough of my posts, I hope you can see this coming....
I submit that citizens want to be able to deposit their money in ordinary savings accounts and receive real savings growth (interest and/or dividend income significantly exceeding the rate of inflation). It is this core citizen need - the ability to receive a reasonable return on savings - that the irresponsible Federal Reserve policies of the past 20 years (under Greenspan and now Bernanke) have prevented from occurring.
With interest rates lowered excessively and the money supply ballooning to promote borrowing, spending and the flow of fees to financial services firms (thereby devaluing savings as a policy priority), the Federal Reserve and US government policymakers have entirely forgotten the actual foundation of a prosperous economy - which is citizen saving (not borrowing and spending, for goodness sake!).
Read between the lines of most of the current financial disaster stories and you will see it.
For example, today's print edition of the Wall Street Journal features a front page story entitled, "Subprime Lender's Failure
I'll be brief. Probably thousands of mostly small investors were essentially swindled when a subprime lender named American Business Financial Services (ABFS) used its investors' money - in many cases, their life savings - to offer subprime loans to high risk customers. ABFS then bundled these loans through Wall Street investment banks that charged millions of dollars in fees to the company. The company and its Wall Street partners are alleged to have misrepresented the value of the loan portfolios as revenue from strapped subprime borrowers fell off a cliff.
ABFS declared bankruptcy, and its investors lost everything. It may have been a Ponzi scheme, we don't know yet.
My point is, this is the kind of behaviour that is promoted when governments and central banks collude to pursue boom and bubble-promoting policies based on excess liquidity. Such policies can be very appealing to voters, who are rarely versed in the complex working of economics - and the inevitably devastating consequences of loose monetary policy.
Certainly the executives of ABFS appear to have been at fault in this scenario. Their fiduciary duty was to exercise oversight and caution on behalf of their investors. That duty appears to have been abrogated.
But let me make clear, cases such as that of ABFS, or on Wall Street recently, of Bear Stearns' engineered liquidation, in fact conceal those truly responsible for financial recklessness. Excess liquidity is promoted by central banks with government backing (or pressure). These are the individuals ultimately responsible for the increasingly barren economic environment that produced such fiscally unsound entities as ABFS. And they, in turn, are accountable to us, the citizens. We are the voters who put them into office in the first place.
With responsible monetary policy, there would be no need for an ABFS to exist in the first place. And there will be no such policy shift until the citizens themselves call for it.
But no casual observer will track the cause of this tragedy to its ultimate source. Very likely, officials at ABFS will be blamed, and if so, they have probably been negligent of their duties. But it is the central bank policies of the likes of Alan Greenspan and Ben Bernanke that have made the creation of ABFS, and hundreds or thousands more companies like it, possible. And it is our complicity as citizens, doing nothing, that allows this set of circumstances to persist.
Who then is most certain to be punished when these circumstances arise?
You guessed it. Ordinary people. The mainstream investors looking for a superior return on their hard-won savings.
And what motivated these ordinary people to risk their nest eggs in such an uncertain venture?
In the interviews with those who were apparently enticed out of their life savings by ABFS and the investment banks, a single theme is clear. The investors in ABFS were all looking for one thing - better returns on their invested savings - because they simply couldn't get by with an ordinary savings account paying interest rates far lower than the actual rate of inflation.
ABFS made bold promises, and offered all the necessary legal cautions, as it frittered away investor's money, much of it for Wall Street banking fees (and very likely for executive perks as well), while misrepresenting the value of its loan portfolios - until the company spiralled out of existence.
As this story and thousands of stories like it illustrate, the Federal Reserve, and with it the authorities of the US government (Bush, Paulson, et al.), are over-invested in economic policies that reward citizens for borrowing, spending and even for defaulting on their obligations, and which punish citizens for what we have traditionally considered to be responsible and desirable behaviour - saving and conserving.
It's that simple.
It's wrong and it has to stop - ultimately with us as voters.
It will cost more to keep throwing taxpayers' hard-earned money at the problem - while trying to prevent the next recession - than to allow the recession to occur, and to bring the now entirely unhinged borrowing and spending madness to its rightful end.
The day will come when saving and conserving will again be preferred to borrowing and spending.
Like it or not, a recession will hasten the arrival of that day, and that is a good thing, particularly in the context of our long-overheated economic pressure-cooker environment.
So let me say it here to Mr. Bernanke, Mr. Bush, and Mr. Paulson (just for starters): Recessions happen. We need them from time to time. They are normal. We will be better for sustaining them. They teach us things we need to know. And, perhaps most importantly - they put a stop to irresponsible, unproductive and wasteful financial behaviour - and goodness knows, there has been enough of that over the past two or more decades to last us probably for several generations to come!
We've had enough of the current low interest rate inflationary policies. Let's stop it here and now and get back to basics - while we can still afford to do so!
Let's stop borrowing and spending.
Let's start saving and conserving.