Guest Post: The Perils Of Underestimating Complexity And Mispricing Risk

Submitted by Keith Fitz-Gerald of Peak Prosperity,

"If you’re rich you get a bailout. If you’re poor you get a handout. And if you’re middle class you get left out." That's not a sustainable way to run the system, exclaims investment strategist Keith Fitz-Gerald.

A cancer at the core of our current economy is the magical thinking, "no pain, all gain" philosophy, pursued by those running it. They are doing all they can to remove the consequences of failure from the system -- blind to failure's essential 'waste-clearing' function in a healthy free market.

Without the discipline of Darwinism, the individual actors in the system make all sorts of malinvestments that would never make sense in an efficient marketplace. But since the losses from these inane pursuits are socialized, there's no incentive to stop making them. At least, up until the point where the class whose back is burdened with paying for the socialized messes finally breaks.

This is the thing: let some of these things fail because when failure occurs you have an asset redistribution. The faulty assets are, in fact, bled out of the system. The quality assets are assumed by responsible parties. That is the law of capitalism. That’s the way it works.


So if we think back to the credit crisis and we think back to what happened in 2007 – 2008 they went screaming and yelling to congress, "Oh my goodness, we’re going to have to do this or the sky’s going to fall!" Well, the sky fell anyway. They pumped $700 billion into this, then a couple $ Trillion. Well, if the government multiplier that all these conventional economists talk about actually worked our economy should be screaming along at six or eight percent right now, but it's not.


And the reason it's not is because it's a complex system and despite all the pushing and pulling they’ve done on one end, they didn’t understand that all these other things would happen at the other end. Too big to fail? It's not too big to fail; it's too big to survive.


We have monopoly laws that we should have been using along the way but our regulators were asleep at the switch. They’re out manned, outdone, outclassed, at every turn of the road. Wall Street does not want to do anything that remotely resembles reigning itself in and it has no incentive to do so.


It sure as hell is not the free market that everybody likes to think it is. And that, to me, is extremely disturbing because they have removed the hand of risk from the marketplace and these businesses now have every incentive to screw up because they know that a) they won’t be held accountable for it and b) they’re going to get bailed out.


They have put so much debt onto this that our unborn great, great, great, great, great, grandchildren could not possibly pay this off. The only way they’re going to get out of this is to deleverage it and remove it from the system.

As an expert on Japan with deep personal ties there as well, Keith and Chris also discuss why that country is a great "black swan" candidate for the back half of 2012.

Click the play button below to listen to Chris' interview with Keith Fitz-Gerald (44m:22s):


Or click here to read the transcript