Waiting for the Spark...
The great Yellowstone fire of 1988 awoke
the rangers to what "zero tolerance" had wrought. A small,
nondescript fire in June of that year, started by a
lightning bolt from a summer thunderstorm, inexplicably
grew to become a raging inferno. The destruction was
multiple orders of magnitude worse than anything ever seen
before. Prior to that year, the worst park fire on record
had consumed a mere 25,000 acres in 1886. This time, more
than 1.5 million acres burned.
The Forest Service has learned from the error of its ways,
and is now working feverishly to correct the problem.
Vigorous policies of deadwood culling, underbrush clearing
and 'controlled burns' are now under way. Yet the task is
akin to sweeping the Augean stables, and rangers admit
their efforts may prove too little, too late. The Forest
Service website offers this grim assessment:
"Today's forests, dense with green vegetation, may seem to
be beautiful, but in fact are deadly. Many forests are
choked with brush and dead trees that make catastrophic
fires a certainty."
What does this have to do with markets and finance, the
normal purview of this space? As it turns out, plenty.
There is another long-standing agency, established 1913,
that is dangerously addicted to "zero tolerance." It is
frighteningly easy to recast the rangers' warning in a
manner fit for the Federal Reserve:
Today's economy, flush with green liquidity, may seem to be
beautiful, but in fact is deadly. Many consumers / banks /
hedge funds are choked with leverage and debt burdens that
make catastrophic downturn a certainty.
As noted earlier, occasional low-intensity fires are Mother
Nature's cleansing agent—her way of maintaining a healthy
forest ecosystem. In an unmanipulated business cycle, the
same can be said of low-intensity recessions. A modest
downturn induces belt-tightening without stirring up panic.
Overextended consumers and businesses rein in their horns;
credit lines are reduced, optimism is scaled back, and
sobriety returns to the fore. A few businesses fail at the
margins, but the healthy enterprises survive. Risk is
reduced, capital is recycled, and new growth takes place.
Unfortunately, Greenspan has emulated the bad old ways of
the Forest Service prior to their Yellowstone awakening.
The Fed's zealous suppression of downturns over the years
has created a build-up of potentially catastrophic
proportions. Thanks to massive liquidity stimulus, business
operations that should have folded linger on. Credit lines
that should have been cut back are extended. Speculators
who should have tempered their bets are encouraged to
become more aggressive. Excessive reliance on easy credit
is mistaken for economic strength, and even bigger bets are
"If a nation values anything more than freedom, it will lose its freedom; and the irony of it is that, if it is comfort or money it values more, it will lose that too."
-- William Somerset Maughan, 1941