If I could see something
-You can see anything you want, boy!
If I could be someone
-You can be anyone, celebrate boy!
Well if I could do something
-You can do something!
If I could do anything
-But can you do something out of this world?
A very interesting debate is developing regarding the business world (perhaps I should say the "government regulation" world) that has more to do with culture and sociology than getting business done. The underlying question is: How much risk is too much?
For a moment, please allow me the freedom to draw an illustration.
Recall when you were a child and bouncing a balloon into the air over and over again. It was enjoyable to see how the balloon floated up and then down almost in a graceful sense. But eventually, there was a missed hit and the balloon shot just out of reach, falling to the floor. At this point, you had to bend over and pick the balloon up before resuming this enjoyable and rewarding activity.
The fun part of this activity is not when the balloon falls to the floor, but in tapping it and watching it dart through the air. When the balloon falls, we are disappointed and, in fact, we do everything we can to avoid having it touch the floor. It feels as though we have failed at this simple task and we might even be embarrassed because it seemed so easy at first.
The alternative is to simply hold the balloon. This way, we can be sure it will never touch the floor and we won't experience the downside of balloon-tapping. But what happens when we choose to simply hold it? We never get to see the graceful arcs or feel the exhilaration of launching it upward into the sky. In fact, we may get so concerned about dropping the balloon that our grip will begin to tighten. Eventually, the balloon gives way and pops.
In many ways, this story illustrates the challenge our society is facing with regard to government regulation. How much risk should we allow companies to take on their own behalf?
I believe it's the last three words of that sentence that are getting lost in this argument.
As long as the risk is tied to the investor, I say let them bear it. But when one entity can take on risk that will be borne by others, the "others" — most typically, taxpayers — should have a say in the amount of risk endured.
Furthermore, in rich societies like the U.S. there can be a tendency to become more protective of what we have and more generous — to a fault — when others suffer.
We hate it when others suffer and have a natural inclination to bail them out. Without debating or even realizing it, we commit ourselves to providing a safety net much higher from the ground than is truly necessary. In short, if you drop your balloon, I will pick it up for you so you don't have to feel so embarrassed.
This may work well on the playground, but in a highly developed economy it drives the masses to limit risks individuals may take. It inhibits freedom and liberty on the part of the entrepreneur.
Instead, we should reevaluate our reaction to failure.
Most successful business people will gladly tell you about their failures and what they learned. In fact, we typically succeed only because we had once or more than once failed before.
The coming financial reforms will be many and will be revolutionary. They may include limiting the size of financial companies and will certainly affect their activities. Where these affected firms are betting with "other people's money" (i.e., the taxpayers') there are surely more regulations needed. But for those firms who clearly will suffer the extent of their own failures, we should resolve to allow them these learning experiences.
Without these lessons, innovation, efficiency, growth, satisfaction and even personal happiness will fade from our society (and not just for those in the financial industry).
The flip side involves much greater regulation, tightening our grip on the balloon until disaster strikes. Better to experience the ups and downs of life than to restrict ourselves to the downside only.
Industrial production dropped 0.2 percent for the month of September. This is the first drop in over a year as output from factories, construction and utilities declined. A slowdown in production would imply that it will take longer to use up excess capacity.
Housing starts increased to 610K annual rate for September, the most since April. This was a 0.3 percent increase from the previous month. The housing sector continues to face challenges with growing foreclosures and depressed home sales.
The Beige Book report indicated that the economy expanded at a "modest pace" in September and early October. However, unemployment continues to remain high and there were few signs that growth was accelerating. The report leaves the Fed open to further quantitative easing if the economy does not pick up.
Initial jobless claims declined by 23K to 452K in the week ended October 15. The four-week moving average fell to 458K. Continuing claims fell by 9K to 4.44 million in the week ended October 9. Though the pace of layoffs have slowed, the claims numbers suggest a sluggish labor market.
The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or SVB Asset Management, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.
SVB Asset Management, a registered investment advisor, is a non-bank affiliate of Silicon Valley Bank and member of SVB Financial Group. Products offered by SVB Asset Management are not FDIC insured, are not deposits or other obligations of Silicon Valley Bank, and may lose value.