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April 2nd, 2008
The Right to Fail
Implicit in the concept of a free market is the ability to both succeed and fail. This duality of outcomes forces the entrepreneur to labor, knowing that if in the long term he is unsuccessful, his venture will fail and he will necessarily suffer the consequences.
James E. Faust commented on the success/failure model when he said:
Everything has a price. There is a price to pay for success, fulfillment, accomplishment, and joy. There are no freebies. If you don’t pay the price that is needed for success, you will pay the price of failure. (James E. Faust, via Quoty)
It is obvious that President Faust did not have in mind the corruptive business system we have today. Life in general does present numerous opportunities to fail, as Faust suggests, but when government is introduced, that right to fail becomes subject to numerous rules, regulations, and political whims.
The most recent example is the Bear Stearns bailout by the Federal Reserve. This large investment firm (which was profitable not too long ago) reached out to the central bank to cover its behind when its liquidity “significantly deteriorated”.
Translated to plain English, this means that the customers of this company lost faith in its ability to remain profitable and give them a return on their money, so they freely chose to withdraw their support. Without that financial support (or “liquidity”), the company soon found itself unable to meet its obligations, and thus sought out assistance from another source.
The reasons given for this bailout have been as numerous as they have been ludicrous. Fed Chairmen Ben Bernanke stated just this morning that “We did what we did because it was necessary to maintain the integrity and viability of the financial system.” Bernanke’s denying that the action was a “bailout” is tantamount to his same play on words (called manipulation by some, lying by others) that the recession we’re facing is nothing but a “slowdown”. This semantical stupidity is entirely unconvincing.
Nonetheless, the Bear Stearns bailout did occur. But, at whose expense? While JP Morgan fronted the acquisition, its funding came directly from the Federal Reserve. As readers of this blog are keenly aware, the Fed can only supply new money by inflating the money supply (or, as the economists say, “creating liquidity”). This causes a rise in the inflation tax, thus diminishing the value of all existing dollars circulating in the market.
The intervention to prevent the failure of Bear Sterns was deemed as “necessary” by central bankers whose success depends upon banking stability. Thus, forcing taxpayers and consumers to foot the bill is of little to no concern.
By so intervening, the right to fail has been suppressed. Wary of the trickle effect that the failure of a large investment firm might have on the economy as a whole, powerful men step in to alter the natural course of business.
We can little doubt but that the bailouts will continue. It should be noted, then, that our “free market” (so championed and touted by aspiring politicians) is anything but free. Rescinding the right to fail will have a disastrous long term economic effect, just as bailing out a troublesome teenager each time he lands himself in trouble would do nothing to correct his bad behavior.
Businesses, like individuals, must be allowed to fail. Only then will they have the opportunity to suffer the consequences of their actions, learn their mistakes, and improve their behavior. Richard L. Evans eloquently summarized the principle half a century ago, when he said:
God grant that we may repent wherever we have departed from the principles of freedom—that we may preserve the right to fail and the incentive to succeed, and live, as did the Founding Fathers, knowing that there are no acceptable substitutes for freedom. (Richard L. Evans, via Quoty)
A wise prayer indeed—one that men in high places would do well to heed.
6 Responses to “The Right to Fail”
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Only the little people are allowed to fail. When your failure ripples through (and threatens to bring down) the entire market, well, evidently, that’s a horse of a different color so far as the goobermint is concerned.
How blessed we are to live in a day when justice and mercy depends on your power in the marketplace. (snark)
Something I’d like to understand better is “what is the Federal Reserve”? The short explanation I’ve been presented with is that it’s a psuedo-private bank with psuedo-governmental powers . . . that our President gets a say in its public face and then it in turn is allowed to to exert major control over the economy.
The reason I ask isn’t simply the Bear-Stearns bailout but it is my understanding that earlier this week the Bush administration enumerated a number of powers it wanted stripped from “purely federal” departments and relegated to the Federal Reserve. In theory I like the reduction of bloated federal government, but I’m a little wary of this move . . . reminds me too much of relegating essential security ops to entities like BlackWater USA.
Doug,
Google is your friend on this one. If you’re really interested, then I recommend you acquire this book.
Transferring power to the Fed has no positive outcome. While it appears to reduce bloated government, it simply transfers authority and responsibility to a secretive, unelected entity, which in no way is held accountable to the will of the people. Jefferson was right, after all.
The idea that the ability to fail is a right is a hard sell. Most people are so afraid of failure that they will give up almost any freedom in exchange for an assurance that they will not be allowed to fail.
Liberty is about having the assurance that we will have the opportunity to succeed, not the assurance that we will be insulated from failure. Confusing those two is what brought us things like government controlled unemployment insurance, social security, and is threatening to bring us universal health care.
When we spend so much time focusing on failure in our attempts to remove the possibility of failure, the end result is almost certain to be failure.
The only way to improve our chances of success (in anything) is to focus primarily on the path that leads to success. Preventing failure is not an option (preventing success is).
Butler’s blog post on the LRC blog today is related to this subject and worth reading.
I, for one, wouldn’t shed a tear if institutions such as Bear Sterns and JP Morgan fail. I don’t partake of any of their services, nor do I have any need of them.
In a certain sense, you could argue that such “investment banking” companies produce no real goods or services, they merely exist to extract interest from creditors, and take a slice of the pie before they pass it along to the actual investors.
Confucius considered traders, merchants, and moneylenders to be the very lowest class of citizens, for that reason.