Wednesday, May 19, 2010

Reforming the Symptom, Ignoring the Disease

“Reform” seems to have taken over from “Change” as the new buzzword in Washington these days.

For a variety of reasons, but primarily because of the political toxicity of addressing our root problems, Congress and the Administration have decided to put band-aids labelled as “reform” over the populist-defined “problems” facing our country today.

However, it’s clear that these “problems” are nothing more than symptoms of larger, more fundamental disease that Congress refuses to acknowledge.

We all know what happens when you treat a symptom and not the underlying cause. The pain might subside for a while, but it always comes back with a vengeance, causing even more damage and suffering.

Let’s use “Financial Reform” as an example. In the never-ending search for a politically convenient scapegoat for which to pin the blame of the “Great Recession”, the popular targets are the big bad banks on Wall Street and their influence on our entire financial system. This includes misguided angst regarding topics such as derivatives and proprietary trading activities, and an incredible lack of angst or urgency for any “reforms” for Freddie Mac and Fannie Mae. These are two government run entities that lost a combined $19.8 billion of taxpayer money in just the first quarter of 2010 - that’s $220 million dollars A DAY! This lack of focus on Freddie and Fannie, while unforgivable, is not the least bit surprising given that Congressional fingerprints are all over that crime scene. Better to sweep them under the rug until the next round of elections is over.

Not that long ago, Congress wasn’t so confident on the causes of the “Great Recession” and the Financial Crisis Inquiry Commission was set up to shed some light on exactly what happened. However, before this Committee has issued a single word in recommendations or conclusions, Congress is taking it upon itself to make its own determinations and “reform” the financial system accordingly.

Would you start chemotherapy without a doctor telling you that you have cancer? Would you start a controversial, radical and experimental drug therapy with crippling side-effects, without a doctor telling you what ailment you’re trying to cure?

Allow me to indulge myself for a minute and pretend to be a Doctor and Mr. Economy just walked through my office door. I can tell right away that there is a problem. I ask him what his symptoms are and he responds as follows:

• Unemployment is high

• House prices are down

• Consumer spending has crashed to the floor, taking corporate profits along for the ride.

• People and companies are defaulting on their loans left, right and center

He goes on and on citing symptom after symptom.

My job as his Doctor would be to determine whether these are all isolated problems that require specific treatments or if these are just symptoms of a more fundamental problem. It doesn’t take a Nobel Prize winner to see that the above are just symptoms of a fundamental problem.

To clear up the symptoms, the fundamental problem needs to be identified and treated. Fire fighting each individual symptom with separate treatments (e.g. tax credits for hiring employees, artificial propping up of the housing market through tax credits and loan modification programs, stimulus programs to increase spending, Financial “reform”, etc.) is not only a very expensive and time consuming exercise, but it may also just mask the root problem for a period of time before it hits back even harder in the future.

Looking at the symptoms, some are clearly direct results of others – but when you wade through all the populist rhetoric, what is really at the root of these symptoms?

Isn’t that a question for the Financial Crisis Inquiry Commission? Wouldn’t it make sense to wait until they have completed their assessments (due by Dec 2010) before we run off and “reform” everything in sight for the sake of “reform”?

In my not-so-expert opinion, the root cause of this crisis trickles down to every American who couldn’t keep their financial house in order. Whether it was taking out an aggressive mortgage, racking up too much credit card debt, or just simply not living within their means - personal financial responsibility was in shambles and when the music stopped the entire system can crashing down, bringing everyone along for the ride.  It makes us feel better to blame our mortgage broker, our bank, our credit card company, the "rich", the "poor" -  anyone other than ouselves. 

If individuals were the drivers behind the “Great Recession” roller coaster, Government policies laid down the tracks used to permit, promote and in some cases even excuse this lack of responsibility. Every aspect of the financial landscape was impacted by some Government policy or subsidy that encouraged this behaviour. The clearest example is in the housing market where low interest rates, mortgage interest tax deductions and Congressional mandates that more low income (i.e. sub-prime) families should be homeowners (via Freddie Mac and Fannie Mae, see above), all contributed to the expansion of what we now know was a property bubbles of epic proportions. In fact, one could argue that Government policies (tax credits for buying a house, loan modification programs, debt forgiveness, etc.) are still artificially propping up the property market.

While it would be convenient to place the blame on Government’s insatiable appetite for self-promotion and re-election, best achieved by providing voters with something for nothing, I still believe the ultimate blame should fall to each and every American who lived outside of their financial means. Regardless of how easy the Government made it to over extend our personal finances, the ultimate responsibility lands with the individual, and until we realize this and change our behaviour accordingly, I don’t expect the “reform” band-aids to prevent Mr. Economy from making repeat visits into my Doctors office complaining of the same old symptoms, over and over again.


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