Debt: let the cataclysm come

In the past few decades running up to the current financial crisis, the United States were increasingly a country of debt.

Debt, debt, debt. If you weren't taking on debt, you were being stupid. It was so easy to borrow money, it was so cheap, most businesses were considered stupid not to rely on debt for financing. It was cheap to borrow in the U.S. because the whole world was putting their savings into the United States, so there was too much money chasing too few investment opportunities.

Year after year after year, decade after decade, this opium of cheap money persisted, to the point that the largest financial companies in the U.S. became so dependent on borrowing, they could not survive without.

Then came a realization that ridiculously large amounts of money have been malinvested. This was caused by subprime mortgage.

Then, in a matter of several months, the ability to borrow disappeared.

Now, every single damn business whose viability has come to depend on borrowing is being threatened with collapse. Several of the largest already have, while others are being pounded.

It is a hurricane, and many people are living in wooden shacks.

Many people are living in palaces that are, as far as their construction goes, just wooden shacks.

Many more people are going to lose jobs working in those palaces, as they collapse.

Some buildings, however, are going to remain standing. Those are the buildings that were built to survive once-in-a-few-decades events. The businesses left standing are those that might have been looked down upon in the past. "Why are you not taking more advantage of debt," others said. "It is so cheap to borrow." "You are losing competitive advantage by not relying more on debt."

Well, it turns out, it is cheap to build a wooden shack. And it can be done much faster than building out of steel-reinforced concrete. The wooden shack is clearly economically superior... until the high winds come.

I see two ways of preventing a disaster like this in the future.
  • One. Let all the wooden shacks collapse, and let only the well-built buildings (and the few lucky shacks) remain standing.

    This causes huge trauma. But the people who were cautious are rewarded: not only are they left standing, but they have a unique opportunity to take a leading role in rebuilding the economy after the collapse. For all the rest, the hope is that their trauma will lead to learning, and that new houses will be built more carefully so as to be able to withstand high winds.

    People do learn from past trauma if they had to suffer it. A real danger is, in fact, that they will over-learn. But people over-reacting individually is better than the government over-reacting universally for all.

  • Two. Do what can be done to prevent most of the wooden shacks collapsing. Help the people whose houses collapsed, at the expense of those whose houses are still standing.

    Note that this is vastly unfair to everyone who put their efforts into building solidly in the past. Not only do they have to pay now to help everyone whose buildings were shabby; their opportunity to take a leading role in the rebuilding is also diminished, as leading economic roles will remain in the hands of those who led the shabby building trend to begin with.

    If people are helped, incentives to solve the causes of catastrophe are removed. Therefore, in order to prevent another disaster, the government must mandate that everyone has to build solid houses from now on. The government has to define what a "solid building" is, which it may or may not do accurately. The government may end up repressing all sorts of useful economic activity by enforcing the "solid building" requirement too much, putting the economy in shackles.
You might not be surprised to learn that I'm in favor of the first proposal. Let all the shabbily built things go down. If they do not, the people who built them are going to remain in power, and things are not going to change that much. That opens up the economy for future crises.


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