Failure Is Not An Option

Anyone who's ever stepped up to a casino gaming table understands the concept of financial risk. Sure, it's normally thought of as "odds," but the principle remains the same no matter the nomenclature. Higher payoffs have a lower probability of happening, and therefore there's a greater chance you'll lose your bet. Same for anyone who's visited a horse track - the nag pays more than the favorite because the nag is less likely to win. Ditto for lotteries - you're more likely to win a couple bucks on a scratch-off than winning the Mega-Millions jackpot.

People play their money accordingly. Some will choose the higher probability, smaller prize gambits, perhaps figuring they're more apt to get more time at the tables out of their money. Others will take the riskier bet, perhaps figuring the thrill of the big win is a greater rush, even if it's much less likely to happen.

The same dynamic occurs in investing. The safest "bet" out there, U.S. Treasuries, pay the lowest rate of return. Anything that pays more is understood to be "riskier," and the higher the return, the greater the risk of loss. There are some distortions at play in the investment world, such as FDIC depositors' insurance that make bank deposits as safe as Treasuries even though they pay more, up to $250K, but the overall picture is simple: higher returns come with greater risk, and any prudent person will judge his risk tolerance in making decisions. Got a few million in a bank? Best keep a close eye on how that bank’s doing. Got a few hundred million there? You watch it like a hawk. Or, better yet, you diversify some risk away by parking it in multiple banks.

What happens, however, if some Big Daddy says "I'll make good on your losses?"

The calculus changes, fundamentally. If you're playing with Other People's Money, aren't you more apt to make riskier moves, or to be less prudent and attentive?

Of course. They've even got a name for that. It's called Moral Hazard, and we all understand it. Reduce or offset or remediate the outcome of bad behavior, and you'll get more of that bad behavior. It extends to all corners of human behavior, not just money. Keep making allowances for a chronically tardy or absent employee, and he'll get worse. Back-stop a junkie, and he'll continue down that road of self-destruction. Continue to forgive a repeat cheater or abusive partner, and the behavior will continue.

You get it. I get it. Anyone who's played a game gets it. Everyone who's studied a bit of economics gets it. Anyone who's paid attention to human behavior gets it.

Why, then, does our government seem not to?

Behold, two current examples:

• A big bank collapses, and sure as the sun rises, the government starts making noises about spending Other People's Money to "make whole" some big corporations whose C-suite types certainly understand risk. For those unaware, Silicon Valley Bank, a darling of you know who-and-where, got greedy with the big flush of cash pumped into its coffers, and locked up too much of that cash in long-term investments that turned south when interest rates started rising. When it didn’t have enough cash to cover withdrawals, rather than sell those investments for a large but manageable loss, it attempted to sell some of its own stock, and that accelerated a run so quickly that regulators stepped in within a day. While SVB’s former CEO, who tells the tale here, doesn’t directly suggest a government bailout, he sounds an alarm that happy-to-spend-OPM-politicians are glad to answer.

• College students borrow large sums of money to pursue low-value degrees, and the President, cheerled by the Left and the Press (but I repeat myself), seeks to cancel some of their debt. That this will primarily benefit the better-off at the expense of the working classes and non-college types is an inconvenience that the Left and the Press (again, I repeat myself) don’t care to report. Ditto for the legality of the move, and don’t make me laugh as to the “fairness” aspect.

In a classic example of “we’re not doing what everyone knows we are doing” rhetoric, the feds are waiving the $250K FDIC limit for SVB (and Signature Bank, which was also shuttered) in order to make all depositors, 90% of whom had deposits in excess of the limit, whole, while telling us all “it’s not a bailout,” because the shareholders and (some) debt holders are not being backstopped.

Spare me the sophistry.

Moreso, who ever heard of an insurer paying more than the policy limit?

Big Business bailouts, camouflaged by doomsaying about bank runs, couching the problem as "Mom and Pop in the streets," asserting the economy itself will fall off the cliff, “systemic risk,” a litany of other emotional ploys, and above all a trite and jollow “this time only” assertion, are cronyism at its worst. That there’s a long history putting the lie to “this time only” declarations doesn’t seem to faze them. Need I remind you of the bank bailouts of 2008-09, the concurrent auto industry bailout, the airline industry bailouts in 2001 and 2020, the Savings and Loan bailout of 1989, Chrysler in 1980, Franklin National Bank in 1974, Lockheed in 1971, or Penn Central Railroad in 1970? Every time, we were told the risk of not bailing them out was too great.

Meanwhile college loan bailout is overt vote-buying and reward to the Left’s most loyal constituency, camouflaged by another dumpster load of emotional ploys.

Both are certain to incentivize more risky behavior.

Why wouldn't they? People who say "they bailed out the last batch, they'll bail me out when I get in trouble?" have plenty of history to back up that conclusion, and anyone who says "just this last time, so you better be more careful going forward" is living in fantasy land. No assurances of “this is an exception” matter, when there are so many exceptions to learn from.

Government creates moral hazard everywhere and everywhen. Welfare programs, ideally intended to give people that first leg up to self-sustaining status, instead incentivize permanent dependence. Rent control laws, ideally intended to help the poor keep their homes, instead incentivize people to stay longer in apartments they don't need, discourage the building of more housing stock, and make things worse rather than better. People building houses in flood zones get below-market insurance rates, and when the floods happen, they just build them in the same place, because the risk calculus has been skewed.

To answer my own question, our Best-and-Brightest do understand the concepts of risk and moral hazard. Understanding, however, does not translate to applying. They are not free marketeers, they are not capitalists, they do not believe in Adam Smith's Invisible Hand or worry about incentivizing bad behavior.

They've no reason to be free marketeers, and allow the proper risk-reward equilibrium to occur. Their priorities lie elsewhere, and their friends (and political "pockets") matter more than principle or the long-term health of the economy. Making the nation work as a free-market economy should is of no political benefit. Buying votes and enriching their already-rich pals in Big Business is.

In their world, failure is not an option. Unless you're too small or a member of too insignificant a voting bloc to matter to them, that is. In which case, you get to pay the bills. You are the "Other" in Other People's Money.

There is some merit to the argument that government does have a proper role in mitigating catastrophic events. Pandemics, hundred year storms and other natural disasters, economic collapses that risk mass starvation, and similar low-frequency, high-impact occurrences may warrant an intercession. That has, unfortunately, been broadened beyond any semblance of reason, for the simple reason that the people who best understand the concept of economic risk also understand the enormous payoff of political pandering. Give a politician a few thousand bucks, and reap millions in benefit. Give a million, and receive hundreds of millions in return In a casino or horse track, the odds would be set such that such a thousand-to-one payoff would be very unlikely. In politics, however, it can be close to a sure thing for the studious and canny.

It's why government keeps growing, bailouts and handouts keep happening, and we keep drifting farther and farther from economic liberty to economic fascism and socialism.

Next time someone blames capitalism for this mess of a system we have today, do me a favor and laugh in his face. Absent the chance to fail, there's no freedom, no free markets, no capitalism, and no escape for those being fleeced to pay for others' failures.