Beware the Junior-High-Genius! -- And -- Pain is Essential

"If Washington rolls back financial regulations, could we see a replay of 2008?" That (words to that effect) was a question posed to me during a meeting last week. My immediate response was
"no. Not, that is, with the current players in the banking system. Not that shenanigans of the sort -- regardless of the prevailing regulatory regime -- aren't indeed likely to repeat, it's just that I suspect the likes of 2008 (a financial sector meltdown spawned by careless securitization of mortgages, and layers of speculation on those securities) will have to come at the hands of future geniuses who now attend junior high school, and who are, thus, oblivious to the happenings of 9 years ago" (words to that effect). I then proceeded to ramble on about the history of bailouts and my belief that had the powers-that-be not rescued the politically-powered bankers/investors of old from their folly, Wall Street's (I generalize) confidence that it could privatize its gains (it keeps em) and socialize its losses (taxpayers forced to come to its rescue) would never have been ingrained in its psyche.

Essentially, I'm suggesting that the financial crisis was by itself (i.e., without any regulatory tightening) -- despite the bailouts -- disquieting enough to jar today's remaining players to prudence. Today's junior-high-geniuses, on the other hand, while they'll indeed study The Greatest Recession Since the Great Depression, having no intimacy with the event, will, alas, likely fall prey to a culture that ultimately protects institutional interests (and policymakers) under the guise of systemic importance (i.e., allowing their failure would ostensibly bring down the system).

Note: My failure herein to describe the contemporary policymaker's culpability in the 2008 credit crisis is in no way to suggest that it does not exist. My, how it does! But that's a topic that requires an essay all its own. I will say that, sadly, unlike Wall Street, I don't believe we have to wait for today's 7th grade class president to make it to capitol hill for politicians to pull whatever strings necessary to further their self-interest -- however thin (dangerous) those strings may be.

I'm reminded of something I penned a few years back and featured in Leaving Liberty?:

In Ayn Rand’s book The Virtue of Selfishness (Rand & Branden 1964), she made brief reference to people with a rare condition that renders them insensitive to pain. My immediate thought upon reading her reference was how such a condition might be analogous to the players in the 2008 credit crisis. So I did a little research. And while it was easy to make my point in the following, I must say that the articles I read and the videos I watched on congenital insensitivity to pain with anhidrosis syndrome (CIPA) were anything but easy to take in; in fact, they were utterly heartbreaking. There are precious children in this world (seldom surviving childhood) who are otherwise as vibrant and beautiful as children can be who literally feel no physical pain. I would never have imagined how truly tragic this turns out to be.

Pain Is Essential
How would you like to be one of the few hundred people in the world who live literally pain free? Never to experience a headache, a bad back, or pulled muscle. Never to need a pain pill, not even an aspirin. To never suffer the aches of an aging body. Think about it: the sheer bliss. The excitement. What would you try? What risks would you take, knowing you’d feel no physical pain?

How would you like to have been a CEO of a major Wall Street firm at virtually anytime over the past thirty years? Your senses numbed by the knowledge that Uncle Sam would steal away your pain if you banged your head too hard. Knowing you could lever-up to unheard-of multiples and never truly lose. Stay in business, get your bonus, pay the staff at your Swiss chalet—or, at the very worst, walk away with a few dozen (if not a few hundred) million, while the taxpayer buys the mistakes off your firm’s balance sheet. Leaving you, or your successors, with billions of crisp new dollars with which to leverage the next bets. My, the risks you would take.

Better to have been the latter. For while the notion of never feeling physical pain may, at first blush, seem amazing, the lives of children with congenital insensitivity to pain with anhidrosis (CIPA) are anything but. Their fingertips are missing, their tongues are mangled, they get heatstroke often (they don’t sweat), fractured bones go unnoticed, and, tragically, their lifespans are shortened. Parents of the CIPA child never rest. They can’t turn their backs for a second, for there’s no physical limit to the harm their child might inflict, unwittingly, upon himself.

As for the Wall Street exec of 2008, he maintains ten finely manicured fingertips and suffers zero fractured bones. Not that his reckless actions didn’t inflict great pain; on the contrary, they did indeed—just not, alas, onto himself. The unavoidable (natural) consequences of his egregious risk-taking and overleveraging were relegated, at the hands of politicians and Central Bankers, to the taxpayer.

As for the moral hazard of bailouts: they’d have us believe that with all the new regulations, too-big-to-fail is no longer a possibility—that, like the CIPA parent, Washington has Wall Street under strict surveillance. But make no mistake: mistakes will be made. As long as we persist in appointing career politicians concerned with merely the immediate term (their term in office, that is), Washington will crony-up to corporate America, unions, etc., and vice versa.

Simply put: pain in life, and in business, is essential.