05 May 2009

Finem Respice on 'The Cult of Buoyancy'

Finem Respice is one of my newest favorite blogs, and I’m almost embarassed to not have found it sooner. Written by an insider in the private equity world, it’s an interesting take on finance and politics that’s different from the investor’s view one gets from outlets like Seeking Alpha or Calculated Risk, or even the economist’s perspective embodied in Tyler Cowens’s Marginal Revolution. Perhaps because it’s written by someone engaged in a profession – that of PE financier – that has lately been made a scapegoat by politicians looking to distract the angry mob from their own incompetence, it doesn’t pull punches where they are deserved.

With that by way of general introduction, the article that caught my eye on FR was “Human Sacrifice At The Altar Of The Cult Of Buoyancy,” which suggests that not only is the ‘bubble mentality’ that led to the overheated technology sector and real estate market not dead, it’s driving the current “recovery” plans by the Obama administration.

Everything in the present climate and the events of the last 30 years is suggestive of bubble worship, unshakable and dangerously, even dogmatically religious in its practice, and consequences. The only aspect of the Cult of Buoyancy in opposition to its title is the lack of fringe status. The Cult of Buoyancy is mainstream.

The ‘Cult of Buoyancy’ is, in short, the belief – bordering on religious faith – that the economy ought, perhaps must, return steady gains year after year, and that if anything interrupts this giant money-printing machine, something is gravely in need of ‘correction.’ Viewed through this lens, I can imagine a believer thinking that market corrections such as the popping of the tech bubble and the current RE slide are not only undesirable, they are unnatural, and must therefore be the fault of some shadow conspiracy. (Whether they actually believe that or not is immaterial; the important point is that there are clearly people in influential positions who act as though they believe it.)

The administration is in the thrall not of the High Priests of Capitalism, but of the Cult of Buoyancy. In retrospect it is quite obvious. The administration wants banks for one purpose. To pump out more loans. Period. This perspective makes almost all of the administration’s actions perfectly logical.

This doesn’t strike me as a particularly controversial assertion. The Obama administration has come very close to saying it outright at various times; their goal is to pour enough cheap money into the banks to “restart” lending (as if it ever stopped; it just stopped being quite so dirt cheap), get the economy back on an upward trajectory via consumer spending and mortgage lending, and – although they generally don’t say this part out loud – leave the underlying problems for someone else to fix at a later date. They take the credit, maybe get a second term out of it, during which they administer another dose of painkiller and soothing words, and are long gone from DC when the patient realizes they’ve been getting morphine for the cancer that’s been steadily worsening all along.

Someone is going to have to stand up and point out to the investing public that there is no quick fix. Someone is going to have to work to start deprogramming the United States after three decades of indoctrination. So long as the Cult of Buoyancy holds such sway, we will never see rational measures to put the economy back on track. We will see the same, tired and now clearly very dangerous tools at work. Inflation. Centralized interest rate planning. Underwriting standards tinkering. Rampant consumerism. Class warfare.

Amen. Of course, I don’t have any real hope that such a ‘someone’ will ever come from Washington; our political system just isn’t designed to allow for it. The public will get milquetoast populists bearing empty platitudes until the flaws in our economy are too obvious to ignore; a point that we are probably at least another one, if not two, boom/bust cycles away from.

The ‘Cult of Buoyancy’ is but a small splinter sect of the big-tent Church of Growth, and that church includes as its adherents virtually everyone who matters in politics, and a fair share of both the Left and Right intellegensia. Even more dangerous than the belief in ‘buoyancy’ with regard to equities and commodities is the belief that the growth experienced by the United States in the 20th century can continue unabated into the next. Any policy founded on this belief, on an assumption of basically never-ending growth, is doomed to failure – possibly spectacular failure, if the policy involves critical social functions like healthcare or retirement.

The current administration’s embrace of cheap-money policies as “solutions” to what they perceive as an economic malfunction is interesting in itself, but the immediate effects of such a policy pale in comparison to its importance as a telltale of an underlying growth uber alles philosophy that makes its non-economic domestic agenda far more dangerous than it might otherwise be.

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