When businesses fail, economic opportunities reveal themselves. Basic stuff. The bankruptcy is the recovery. Think about it.
It’s too easily forgotten that when businesses go out of business, they don’t vanish. Instead, their desks, chairs, computers, office space, and human capital are released to better stewards. Same with the assets on their books. In bankruptcies, intrepid and not-so-intrepid investors are able to acquire equity stakes and income streams on the relative cheap. The bigger the failure, the greater the economic opportunity.
This is something to think about as pundits like Joseph Sternberg urge readers to judge Joseph Biden vs. Donald Trump based on how each would respond to a “financial crisis.” Sternberg is approaching economic matters in the wrong way, and the wrong way is rooted in his incorrect belief that failure is “financial crisis.” No, it's not.
While Sternberg views it as “cheery news” that we haven’t experienced anything of late like the decline of Lehman Brothers in 2008, the reality is that Lehman’s decline only shook the markets insofar as investors had come to expect intervention in bankruptcies that, if left alone, would logically improve economic wellbeing. To suggest otherwise is to suggest that what we call an “economy” would be better off if instead of poor stewards of capital being replaced via failure, that true progress would be had if politicians had plans in place to intervene the next time investors deem a corporation unworthy of more capital. Sternberg gets it backwards, which leads him in other faulty directions.
Of the view that mistakes in the marketplace must be met with policy, Sternberg fears a lack of policy will be the source of future financial crack-ups. In Sternberg’s words, the problematic “message from the powers that be” about the health of the financial system is that there’s nothing notably unhealthy, or per Sternberg “Nothing to see here, folks.” Sternberg equates "nothing to see here" with no central plan.
Actually, the “nothing to see here” countenance of the political class is logical given the obvious truth that if politicians had any kind of ability to see around the corner, they almost certainly wouldn’t be in politics. They’d instead be billionaire investors. Since Sternberg seems preoccupied with 2008, it’s worth noting that John Paulson didn’t achieve billionaire status in 2008 because every investor agreed with him about mortgages, but precisely because they did not. And if investors generally can’t see around the corner, it’s only reasonable to understand that politicians most certainly can’t.
On the matter of future market troubles, one guesses that Sternberg is flying a bit blind too. Despite this, he lists the “commercial real-estate market” as one of the “financial risks." But if true, Sternberg can rest assured that it’s already priced. He also mentions “the rapid growth of non-bank financial institutions” (think asset managers and hedge funds) as a risk factor, which is just odd. It’s odd because banks are massively overregulated, the latter helps explain “the rapid growth” of non-bank alternatives, which is just a happy sign that markets are working around intervention. A good thing, right?
Apparently not to Sternberg. While he agrees that “the culture wars are a lot more fun,” he wants Republicans and Democrats to develop plans for unforeseen business failures. Put another way, Sternberg wants voters to judge politicians based on how they would intervene in the marketplace. No, this is truly backwards. If voters really want to avoid a future “financial crisis,” they would vote for Biden if he promises to go to bed after the next financial institution failure, and Trump if he promises to play golf.
