Lesson We Keep Missing in the Financial Crisis: Bite the Bullet Now

Investors have a saying - your first loss is your best loss.  In other words, if you think an investment sucks, swallow your pride, take your lumps, and get out entirely now.

This is NOT how we have dealt with the financial crisis.  Through a series of bailouts, we have tried to keep failing financial institutions and countries on life support.   We have dragged out the reckoning on mortgages, so we still have not had a real clearing in the real estate market.  Worse, we have postponed, even entirely interrupted, financial accountability for those who made bad investments or took on too much debt.

Here is an interesting counter-example - Iceland, which basically went entirely bankrupt along with pretty much all their banks, is on the road to recovery.

  • http://sevencontinents@mindspring.com Benjamin Cole

    The answer to national debt problems is: 1) balance budgets, even run surpluses and 2) print more money.

    The problem? The liberals want more fiscal spending, and the Chicken Inflation Littles are the dominant fowl on the right wing.

  • litehouse

    "35% of all households in Iceland are still in a serious default position with their debts, even after being able to tap in to their pension funds in order to stay solvent" and the current dynamics in iceland make "this facade of economic recovery as the economy is basically being rebuilt on the same hollow ground and with the same rotten wood that led to the crash".
    Note all that glitters is gold.

    http://www.christopherc.net/?p=101

  • Rick Caird

    I have not seen anyone really discuss this, but it seems to me the total pain required to get out of these problems is the same whether you take it all at once or "extend and pretend" as we are doing now. The difference is takes a whole lot longer to pretend we are fixing something than it takes to actually fix it.

    As I recall, the politicians in Iceland wanted to take on the bank debt. It was the voters who said "no".

  • Sam L.

    I'd call it "throwing good money after bad", except the money isn't as good as it used to be.

  • Ted Rado

    The idiots in Washington don't have the cojones to face up to the problem, so they just keep putting off doing something. My bet is they will inflate away the debt over time. Our financial assets will eveaporate.

  • caseyboy

    It may take a little while longer, but inflation, even in the bogus index the government promotes, will start increasing. Helicopter Ben will never be able to land the space shuttle on an aircraft carrier and that is what he is trying to finesse with his monetary policies. I agree with Ted Rado, our financial assets will evaporate in real dollar terms.

  • Ted Rado

    I would assume that the laws of thermodynamics apply to wealth as well. You cannot create wealth out of nothing. All the financial double shuffles in the world will not permit a person, or a nation, to spend more than he takes in over time.

    Some financial gurus (morons?) have created the illusion that some slight of hand will overcome this problem, and that we can continue to spend beyond our means forever. This is utter nonsense, unless the USG and other debtors assume inflation will do away with the debt. In effect, they are stealing from the investors and lenders. I wonder if government officials are not sealing the doom of USG and other bonds. Who will buy bonds in the future when it becomes obvious that money so invested is down the drain?

    Another statement of the obvious. To achieve instant gratification, we wind up with huge interest payments on our debts. Had we waited till we had the money before spending it, that interest money would be available for other needs.