You can learn a lot by simple observation. Last week, there was a brouhaha as several banks nearly collapsed, and then some did. The usual discourse will be set with educated people explaining how something was right, wrong, or neither. A joint statement by the FDIC, the Federal Reserve, and the United States Treasury affirmed their resolve to protect the system. While most coverage will try to confuse you with a labyrinth of econobabble whose goal is to convince you that it’s too complex and you can’t understand it, the reality is quite simple. In their attempt to hurt the right people, they accidentally hurt the wrong people.
How Did This Happen?
First, we must examine how we arrived here. In the post-2008 financial crisis, the economy was in rough shape. Simply put, there were too few jobs/businesses and too many workers. To solve that, the government decided to flood the markets with “easy money,” lending below the inflation rate, which led to a torrent of economic activity that would absorb the jobless.
This created the cancer capitalists that built companies that never made money but soared in value as their businesses (and losses) grew. The money to be made was not in profit but in the shares they could sell of companies highly valued on their ever-growing promises of dominance in the future.
Who doesn’t want to be in early for the next Google or Facebook? It would be great! Because these companies didn’t need to make money, they could be very inefficient in almost every facet. In fact, to maximize valuation, you needed to overpay and over-hire. Why wouldn’t you if you would dominate the on-demand dog-washing market? Are you going to be the market leader or not? Go big or go home!
This coalesced nicely with government policy — it absorbed workers into the market, and they got paid an above-market rate. It was a win/win except for legacy companies that made money or were good at getting good returns on their investments. Those legacy companies didn’t help solve the problem; they were efficient, which was the problem.
The new companies were the ones that would freely spend more on just sales and marketing than they brought in revenue, not the old guard. These companies were very inefficient, which made them fabulous (at least to the government). Sure, people were getting fabulously wealthy on questionable investing principles, but that was a small price to pay because it solved the problem of the greater good — we had enough “startups” to absorb the unemployed. People were attached to society, and all was good. People could complain about politics, taxes, or whatever while subscribing to environmentally sustainable seasonal doormats from hot startups. Life went on.
Then came the pandemic, which led to massive stimulus to avert a massive depression, which swung things the other way. We made a society with too many businesses and not enough workers. Simple enough! We’ll tighten things up. We don’t really need fake companies anymore. After all, there need to be more workers for the real economy now.
Think of it like a balloon; government policy inflated it (through free money programs), and now it intended to do the opposite, deflating it, which would re-balance the economy. This controlled demolition was coordinated by the brightest policymakers in the land to hurt people who work for a living so that they would be in the office at 9 am instead of hot yoga classes.
Unfortunately, the government can’t control how things deflate exactly. The most fragile parts will break first if you put enough strain on any system. If you put enough weight on your body, your weakest joints will eventually snap first. It is expected! Instead of having the ordinary workers of society “deflate” in an orderly manner, the weakest “joint” turned out to be the newly rich and their risky investments. Imagine how frustrating it is for policymakers when the nouveau rich, who skimmed money from society by creating fake companies for a phony economy, are getting pulverized while the working class still had good jobs and long waits Friday night at Olive Garden. After all, who has more than $250,000 in cash in a bank account? Who needed saving? Not the average Joe or Jane.
At this point, it is essential to understand why hurting the wrong people means it will hurt more when they hurt the right people. Imagine there are 5 friends, with 1 person (call him “Rich”) having $20, and everyone else has $5. The government, learning from the 2008 crisis that they a) went too slow and b) too small on stimulus, decides to do the opposite, so the crisis this time is abbreviated. They create free money programs that double everyone’s savings. Now Rich has $40, and his four friends have $10. Net-net, everyone is $40 “wealthier” (Rich has $20 extra, and the four friends have $20 extra combined). Everyone feels so good they buy a big drink and popcorn combo when they go to the movies. Now the economy has become hot (because everyone feels too good), and you have runaway inflation, angering everyone.
Something must be done. Easy! We’ll reverse the free money programs by raising interest rates and making things more challenging. Unfortunately, Rich, being rich, has his money in with all the other rich people doing rich people’s stuff. Even more unfortunate because government policy is disproportionately whooshing away the stuff rich people have (because it’s the highest beta or moves the most relative to the real economy, like startup investments). Rich’s bank is now collapsing. The bank only has government guarantees for $20, so Rich is out $20. Excellent! It is working; over time, Rich’s friend’s assets will deflate (but slower because they aren’t in as sophisticated investment vehicles that can lose money quickly). Then, life can return to normal.
Oops! Rich wasn’t the one who the government wanted to hurt. They had hurt the wrong person. Something must be done! Quick, we’ll coordinate at the highest levels of government. We’ll bail out Rich, but we won’t call it a bailout. We’ll say we’re protecting the people we are trying to hurt by keeping Rich, rich. We’ll say it’s to save the payrolls of small businesses. Who could be against that? So, Rich…well, he gets to stay rich. He receives the gains of the stimulus but none of the losses. However, the government still has an overarching problem they are trying to solve there is still too much money. They are still trying to remove the $40 they created. Rich being rich is now “systemically important,” so he must stay richer. The losses must come from somewhere else.
The Problem with the Plan
And that is where the plan delivers the chef’s kiss — they will hurt the people they want to hurt even more. Instead of Rich’s friends, each losing $5 to get things back to where they were, they each have to lose $5 plus the amount Rich should have lost ($20), so the friends each have to lose an additional $5, leaving them broke. So, we’re left with rich Rich, who has $40 and laments to his broke friends; I wish you worked harder to vacation in the south of France with me, but you can’t. Try harder!
The real lesson is that it’s simple. We can learn what’s going on through simple observation. Clearly, the government is trying to slow the economy to dampen inflation and return the world to normal. When they hurt the right people, like in 2008 when people lost their homes, assets, and livelihood – it made sense because it was “free markets” and “capitalism.” However, when they hurt the wrong people (like the banks, the rich, or the politically connected), protecting them is deemed “systemically important” because we are really saving everyday people’s jobs. The problem is that when they hurt the right people, there won’t be any help. There will be free markets. Pull yourself up by your bootstraps. When that happens, we’ll know they are hurting the right people.
There is a firehose of opinions you can listen to that will opine on what happened last week. Of course, you will be implored to believe that the issues are too complex and sophisticated to understand the grift. But just by simple observation, you can distill it to what it really is. They hurt the wrong people. This also means it will be much worse for those they plan to hurt when they hurt the right people.
This is an opinion piece.