The Right to Fail

In my English (composition) classes, we are discussing "the right to fail." I tried to show my students how bailing banks out and not allowing them to suffer the pain of failing (and yes, that includes all the people that work for those banks and all the people that have money in those banks who would be suffering that pain, as well) is just postponing the inevitable. Because they know they'll be bailed out (in the case of Fannie Mae and Freddie Mac) there was no need to be extra careful with the money. Because they were Government Supported Entities, they were guaranteed government support! And because they knew they would be bailed out, they didn't care. Therefore, they "failed." Or should have.

Or maybe they just made poor decisions. Like kowtow to government pressure to make really BAD loans. Yeah, I understand why the banks did so. ACORN can make life miserable for the bankers, sending activists to bankers' houses, scaring their children. But then, going under from defaulted loans can make life pretty miserable, too. I kinda, sorta was okay with the first bailout because government action precipitated the meltdown (but not the amount.) Then I discovered the book-cooking at Fannie Mae, and I thought, no way.

My students get it when we talk about students that were just passed along even though they did nothing to deserve passing. Some of them wished they had been required to learn rather than moved to the next level. They found themselves getting farther and farther behind and finally overwhelmed by their ignorance enough to give up. And where was the motivation to try harder, to identify and solve the problem? If it didn't really matter what they did, why should they try?

Banks and companies learn in the same way. The motivator of the free market is two-sided: the hope of making great profits pulls the businesses forward, and simultaneously, the fear of failing pushes it from behind. If they are not allowed to fail, then they don't learn what they are doing wrong. And if they don't learn what they're doing wrong, how can they change their behavior and learn to do right?

AIG has been bailed out twice. It's still in trouble. GMC is asking for more money. Why? Because they haven't figured out what they did wrong before to get them in trouble in the first place. (Well, maybe they know, but they're not acting on it. Shrug. Who cares? Why try? The government will keep us running.) And of course, the government -- that can't run its own financial house -- will dictate the running of the bailed out companies. How absurd!

I'll tell you something else. The sooner those "failure" lessons are learned, the less painful they are. If a child is allowed to do whatever he wants, he grows up unaware of what is right or wrong, what works and what doesn't. If a child always gets rewarded for participation and not excellence, then he will strive only to participate, and that not very well (because everyone else is getting the same award, so what does it matter?) Then once he gets out into the real world, he will make such huge mistakes that he may not recover from the failure setbacks. If, however, he is reprimanded and/or allowed to suffer the natural consequences of his bad choices as he grows up, he will learn how to learn from his mistakes.

We need to let the banks, auto makers, and big businesses fail, so that in the long run, we will have better businesses. Unfortunately, our economy has been being "bailed out" by the Fed for so long, that this failure will be a very hard one for all of us to suffer. But prolonging that just will make things worse when the failure does happen.