The forest economic model?

silverharp

A few economic commentators have used the analogy of a forrest and forest fires acting as a clensing mechanism, see extract from article below. does is stand up in your opinion? if its an economic "reality" are policy makers doomed to fail in achieving their objectives?

http://www.financialsense.com/Market/daily/wednesday.htm



There are several reasons why I believe we are going the route of Japan rather than the Great Depression II. Back in the Great Depression banks were allowed to fail and all of the excess of the prior decade were wiped away in just a few short years, while Japan supported insolvent banks creating what came to be known as “Zombie Banks.” The Great Depression allowed all of the dead underbrush to be burned away by the deleveraging fire, while Japan quickly dumped massive amounts of water (Yen) on the fire and the dead underbrush was not removed. As a forest fire clears the way for healthy growth in future years by giving room for new trees and the strong trees that survived (solvent banks that were responsible) room to grow, trying to prevent forest fires keeps the unhealthy trees and dead underbrush able to compete for resources with the strong and healthy trees, weakening future growth. This can be seen below where after recovering from the Great Depression the economy saw growth rates ranging from 9-12%, with the subsequent expansion showing growth rates nearing 20%! With Japan, however, their economy has fluctuated between -3% and 4% for the past 12-15 years.

ps- i realise he should have mentioned the little fact of WW2:rolleyes:

BenjAii

While I agree one huge flaw in the current recapitalisation is rewarding banks who made stupid decisions with more capital, I don't think the forest fire analogy works though.

It assumes if these were cleared away (risking a true collapse in the global economy far worse than what is happening at present) than healthy non-stupid banks would spring forth to dominate the landscape.

Maybe, maybe not, in any case launching Armageddon to find out is a high price to pay.

I can't help but think that the answer to not letting banks get the run of themselves with regard to stupidity and greed is to change the due diligence/regulatory framework they already operate in.

silverharp

BenjAii wrote: »

It assumes if these were cleared away (risking a true collapse in the global economy far worse than what is happening at present) than healthy non-stupid banks would spring forth to dominate the landscape.

Maybe, maybe not, in any case launching Armageddon to find out is a high price to pay.

you would have to admit though even in hindsight that the time to "test" the theory was in 98 or 2001. I have no expectations that gov or central banks wont throw the kitchen sink at this however given the course they have chosen then they are telling the investing public to expect most asset classes to be lower a decade from now then they were last year. That's the message I'm receiving


I liked the Rogers quote

"What is outrageous economically and is outrageous morally is that normally in times like this, people who are competent and who saw it coming and who kept their powder dry go and take over the assets from the incompetent," he said. "What's happening this time is that the government is taking the assets from the competent people and giving them to the incompetent people and saying, now you can compete with the competent people. It is horrible economics..."


While not saying how long the U.S. economic recession will last, he said conditions could ultimately mirror those of Japan in the 1990s. "The way things are going, we're going to have a lost decade too, just like the 1970s," he said…

BenjAii

silverharp wrote: »

"What is outrageous economically and is outrageous morally is that normally in times like this, people who are competent and who saw it coming and who kept their powder dry go and take over the assets from the incompetent," he said. "What's happening this time is that the government is taking the assets from the competent people and giving them to the incompetent people and saying, now you can compete with the competent people. It is horrible economics..."

In addition to the problem of rewarding incompetence and thus allowing it to be recreated, is the creation of huge moral hazard, which I think could be even more destructive.

For those that don't know moral hazard refers to a party in a financial transaction being insulated from risk and thus acting more recklessly because their actions don't have the usual consequence they would if they had had to be held accountable.

We have now created this across the Western World on a scale never before seen.

From 2008 onwards all our banks & institutions know that if the worst comes to the worst, they can come with their begging bowls to the taxpayer and get bailed out.