Learning How to Fall

Learning How to Fall

When I was a young boy, my father taught me how to ride a bike. At first, he held onto the back of my seat and ran with me. Then, as time went on, he started letting go. Right before I would fall, he'd grab the bike to steady me. Then one day, he just let me fall.

Crying, I asked, "Why didn't you catch me?"

He replied, "If I didn't let you fall, you'd never learn how to stay up. Once you learn to identify what it feels like when you are beginning to fall, you'll be able to learn how to make the proper corrections not to fall."

I didn't understand at the time, but my father was teaching me a valuable lesson. You must learn from your mistakes to move forward.

Propping Up Rates

We've just experienced the biggest recession in US history, the largest downturn since the Great Depression. The root cause of the downturn was irrational exuberance--people buying up liabilities even as the pricing was making no sense. This created bubbles and eventually they popped. And while there was significant fallout, the reality is that the government has caught us before we truly crashed.

By way of example, just this morning it's reported in The Wall Street Journal that the Fed is considering a quantitative easing program to artificially depress interest rates and spur inflation. The reason? "Fed Chairman Ben Bernanke last week reiterated his dissatisfaction with the recovery, saying the economy has failed to grow 'with sufficient vigor to significantly reduce the high level of unemployment.'"

Essentially, the Chairman is saying recovery is not enough, it must be a quick recovery. Therefore he is advocating artificial stimulation. While I would love a quick recovery, I don't believe it should come artificially. That doesn't solve the underlying problems. It just puts lipstick on a pig.

Propping Up Housing

We can see this also in the housing market, where pricing has risen since April thanks to the residual effects of the government stimulus money that gave credits to home buyers. But now that the credits are expired, sales are slower and downward pressure is being put on pricing again.

The Wall Street Journal reports, "Home prices began rising in April, boosted by the expiration of the first-time home-buyer tax credit that had new homeowners flocking to buy homes. Before that, they had fallen sequentially for six straight months. Home buyers and sellers have been stuck in a stalemate for months now, with sellers reluctant to lower prices and buyers remaining on the sidelines."

Because the root problem wasn't addressed, and housing was propped up, it now is ready to fall again.

Propping Up Banks

We all know about the monstrous bailouts the banks received from the Fed, but seems like that wasn't enough. This morning The Wall Street Journal reported that J.P. Morgan who profited from the crisis through the acquisition of WaMu is seeking from the FDIC $6 billion in claims from various fallouts resulting from the WaMu deal. They paid $1.88 billion for the bank's assets.

Per the article, "The letters to the FDIC are the latest example of how J.P. Morgan Chase could be helped by a deal struck at the height of the financial crisis. The collapse of WaMu was the largest bank failure in U.S. history, and J.P. Morgan's purchase gave it $188 billion in deposits and a coast-to-coast presence—2,207 additional branches—for the first time. J.P. Morgan has benefitted from the WaMu transaction. The bank recorded a $2 billion gain based on accounting adjustments in 2008 and 2009, concluding the fair value of the assets was higher than what it paid. The bank has also said it may be able to earn as much as $25.5 billion in interest from its WaMu loans. It could receive as much as $6.9 billion in assets as part of a proposed settlement from the bankruptcy of WaMu's parent company", Mr. Starke said.

Why would J.P. Morgan be allowed to do such a thing? It's part of the deal struck with the FDIC's receivership. Despite getting such a great deal on the assets, J.P. Morgan also shifted all the risk to the government. That's a pretty sweet deal. It's also another example of a government prop up.

Learning to Live With Risk

The biggest problem with all these prop ups is that risk is eliminated, which causes more reckless actions, which causes more falls. But until the true culprits feel the effects the fall--instead of us tax payers--the real problems causing the falls will not be fixed. People must learn to accept risk and take a fall in order to truly grow. I learned that as a child when I learned to ride my bike, falling many times.

While there is no way we can force the government and the banks to learn to live with risk, take a fall, and learn the lesson of that fall, we can do this for ourselves. We can both learn from our own mistakes and the mistakes of others. That's why being a student of history is so important--and why financial education is more important than ever.

Today, take inventory of the falls you've experienced in life. What did you learn from them? Use those valuable lessons to move forward and avoid future falls. Until the root problems of our financial crisis are fixed, we're in for a rocky road ahead. For you to survive and thrive you must learn from your mistakes and the mistakes of others.

Original publish date: September 28, 2010