Saturday, September 13, 2008

Bailing out.....

One of things that is praised often about USA is that anyone can start off afresh after screwing up - however badly. In other societies, if one screws up badly enough, he or she is branded as a failure and is not given another chance. It seems in USA, you can screw up, raise both of your hands, show your back, declare bankruptcy and walk away from all your problems and worries. Nobody can come after you. You are free to retreat for a while, after things have settled  and cooled down, you are free to come back and start your act all over again. I hope when you start all over again, you use the lessons learnt from previous episode, do not repeat the same mistakes and try to make the best of use of the second opportunity given.

Some people may not agree that it is a good thing to do. People or organizations should not be let go so easily when they  screw up. What's the alternative? Punish them? That's post-screw up. Does not serve much purpose. On the contrary, not picking up a person when he has bitten dust will kill the risk taking in that person for life. Once risk taking quality dies in enough people, as a society we become extremely risk averse and without taking risk nothing significant can be achieved.

You know, banking and financial sector is not doing very well off late. Like many, they got suckered into real estate boom. Financed all sort of real estate deals and carried a lot bad loans on their books. With real estate doing badly, assets on their books are worth nothing. This is what happened with banks like Bear & Sterns, Fannie Mae, Freddie Mac and now with Lehman Brothers. US government, which nothing but society in general, bailed off Bear & Sterns, Fannie Mae and Freddie Mac. Society may not bail off Lehman Brothers as easily as it did others but help may be on the way.

Pure capitalists may say that nobody other than pure-play market should ever intervene when such things happen. It is easier said than done. Although banks must have been stupid to take so much risk, their risk taking created wealth somewhere. Some people have certainly benefited from their risk taking. Quite a few people made tonnes of money. Now, if we mercilessly put these banks down, in the future, we reduce opportunities for creating further wealth. Same thing can be said about dot com boom and bust of 90's. There were indeed excesses but wealth was created and some of which was lost - or shifted. But, did it do good for the society? Yes. In many ways. As in many cases, what we  paid for great experience is probably pennies on dollars. We really learnt some lessons about IT business. Let's think that what we may have paid in terms of financial loss as the tuition paid to learn that lesson. Similarly in the case of banks, what we paid is for the lessons learnt in terms of better banking standards and processes.

As an individual, it is easy to feel bitter about your tax dollars being used to bail out these banks for their mistakes. If you do not do that, who else will? Don't we want the society to progress? Progress comes only from experimentation. There is nothing called failure to an experiment. There are only outcomes. Some outcomes are what we want and some are not what we want. Chances are every outcome has some lesson for us to learn. We just need to become more objective about learning from the experiences than scoffing at the people who do all sorts of experiments.

As a society, if we want to do better we need to assure members of our society that it is okay to take risks and we are there to back them up. If society fails to do that, such enterprising individuals will look elsewhere and go to those places where people are more welcoming and encourage their experimentation. Till now USA has remained as the place to experiment because society here is known to give more than one chance for people to succeed. If US starts becoming risk averse, as it is becoming by adding more rules and regulations, we are going to lose out. Let the people make mistakes with a firm knowledge that there is a safety net. Let's get better at how we organize the safety net. Let's put more reasonable checks and balances so that we do not encourage large scale negative outcomes. Let's get better at identifying anomalies and doing better course corrections.

It may be painful when you  have to fork out  hard earned money to bail these people out. But, only such enterprising companies and individuals have created wealth. Least we can do is to suffer occasional little discomfort in the hope that giving these people another chance will pay off  bigger rewards. People with this mentality have been seldom proven wrong.

Long live sensible capitalism - fastest vehicle to wealth creation.


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