When Dubai wobbled last week, everyone rushed to the Internet to await confirmation of the imminent bailout.
And they saw what they wanted to see!
The airwaves (and pipes) were clogged by a steady stream of pundits declaring that there was no way Abu Dhabi would let Dubai go bust.
Because if Dubai went bust, then… well… then the stock market might go down for a while! Then the idiots who loaned Dubai World money to build huge islands and buildings in the desert would have to pay for their stupidity! Then the buildings’ ownership would change in a debt restructuring–the kind that happens every day in a normally functioning capitalist economy!
Remarkably, against this tidal wave of panic and entitlement, Abu Dhabi stood its ground, refusing to reward idiocy by throwing more good money after bad.
And lo and behold… the world’s stock markets have stabilised and Dubai is having civilized conversations with its lenders, the same way folks who have had to restructure their debts have had since the dawn of time.
In the United States, meanwhile, Messrs. Bernanke and Geithner no longer have to assure us that they will never let a big bank fail–because we understand that this guarantee has basically been written into the United States constitution. The LESSON OF LEHMAN BROTHERS has been learned, and the lesson is this:
We have become a nation of mamma’s boys.
Specifically, after 25 years of debt-fuelled consumerism, we have become accustomed to instant gratification and instant fixes, led by politicians and regulators terrified of having to tell us the harsh truth:
We lost our discipline. Getting it back will make life tougher for a while. But it will make us stronger in the end.
It wasn’t always this way. In fact, the era of prosperity that we’ve just enjoyed was made possible by a leader with a huge spine–one who, unlike our current financial and economic leaders, wasn’t afraid to risk his job (and enormous public pressure and disapproval) to do the right thing.
Who was that leader?
How much public hatred was Volcker willing to withstand to get us back on the right track?
Take a look at the chart below. The red bars are the Fed Funds rate (which Volcker directly controlled). The blue line is unemployment (which he indirectly controlled).
In 1980, with the country beset by chronic, runaway inflation, Paul Volcker decided to do something about it. Specifically, he hiked rates sharply, into a weak economy.
He killed the economy.
Unemployment soared–spiking from 6% to well over 10%, the highest level since the Great Depression. The economy crashed back down into a double-dip recession. Millions of Americans were put out of work. The stock market plunged to 15 year lows.
But Paul Volcker held fast. And a few years later, inflation was all but dead, setting us up for two decades of prosperity (and one of letting ourselves go to pot).
Fast forward to today. Today, we are led by men like Ben Bernanke and Tim Geithner. Men who are so afraid of the consequences of making people pay for their profligacy and stupidity that they have restarted the debt bubble (free money and bailouts for Wall Street, FHA, cash for clunkers) and made Too Big To Fail a national policy.
Take another look at that chart.
Do you think Ben would be willing to withstand the heat that Paul Volcker took to get this country back on track? Tim ? Larry Summers? Do you think any of them would be willing to stand up and deliver the message this country–and Wall Street–desperately needs to hear?
We don’t either.
But at some level, we can’t say we blame them. Given our current national attitude, we would fire them instantly for even daring to suggest such a thing.
But we’d still be better off hearing it. And it would make us stronger and better in the end.
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