Fast and Ugly or Slow and Ugly

It’s all about that hoary art called crisis management. When you are up against the wall, when you know you are in trouble, should you take the hit now or try to postpone it for later.

As James Grant puts it, you can deal with a crisis “fast and ugly” or you can deal with it “slow and ugly.”  Link here.

Given that Grant is a leading authority on the credit markets, he was talking about the way the financial crisis was managed by the Federal Reserve.

I recommend that we look at the way the concept applies to economic situations, and then, once we have grasped it, apply it to other life situations. .

Let’s begin with Grant’s remarks.

AP reporter Bernard Condon asked Grant: “ What would you have done in the financial crisis if you had been in Bernanke's position?”

Grant replied: “ Resign. I don't know. I have great faith in the price mechanism, in the mechanics of markets. I think there should have been much less intervention and we should have let some chips fall, many chips fall.

“Before the Great Depression, there was a great depression (lower case `g') in 1920-21. Within 18 months, the GDP was down double digits and commodity prices collapsed. Harry Truman lost his haberdashery in Kansas City. It was very painful, but it ended. And the Fed, during that depression, actually raised its discount rate and the Treasury ran a surplus. The reason it ended was the so-called real balance effect -- that is, prices came down and people with savings saw things that were cheap and they invested. That's the fast and ugly approach.

“The slow and ugly approach is to mitigate, temporize and forestall to give us time to work ourselves out of difficulties. That's the current approach. I think it's intended to be a more humane approach, but I wonder about its humanity. I mean these college kids get out of school and they've got nothing. It's awful -- 9 percent unemployment and going nowhere except sideways.”

Most of us are never going to be in Ben Bernanke’s position. Most of us do not formulate monetary policy for the United States. Most of us do not know enough to grasp the complexities of the financial system and to know what should or should not have happened. And most of us do not know what would have happened if the financial system had collapsed in late 2008.

Thus we try to grasp concepts by relating them to everyday experience.

Here, things become somewhat clearer.

Let’s say you’re broke. You cannot pay your bills. You have a mortgage and credit card debt, to say nothing of household expenses. You have precious few assets, and your salary does not cover your debt and expenses.

You consult with a financial advisor and he gives you the grim news: you should declare bankruptcy, wipe out much of the debt, and rebuild your financial house.

And yet, bankruptcy has a stigma, so you hesitate, you procrastinate, you dawdle. Worse yet, you haven’t just been using credit cards to pay off your debts. You have been using them to fund a lavish lifestyle that you simply cannot afford.

If you declare bankruptcy, you will not have to worry about paying off your debts, but you will have lost all of your credit cards. You will have to start living within your means.

What will happen to your carefully-constructed reputation as a person of means when everyone figure out that your lifestyle was based on debt?

Then one day, you open your mail and there it is: another offer of free credit. It feels like God is trying to take care of you.

The Bank of XYZ is offering you a new line of credit. It gives you access to lots of money at 0% interest for the first nine months. All you need to do is write a check. After the nine months have come and gone, the rate goes up to 14%, but  why worry about tomorrow before you really have to.

With the new line of credit you can pay your bills. You can even borrow from the bank to make the payments on the money you are borrowing from the bank.

For months, maybe even years, you do not have to explain to your children why they can’t go away to camp thus summer. Sounds like a good thing.

If you take this option, you will avoid the shame of bankruptcy. Of course, you will eventually be broke again, facing bankruptcy.

All things considered, bankruptcy is inevitable. You are choosing whether to do it now or later. Fast and ugly or slow and ugly?

Now, you will be thinking, if you are going to have your debt wiped out in bankruptcy anyway, why not pile it on, live it up, and have a good time before the inevitable arrives?

The reason is simple: if you are flat broke and declare bankruptcy today, you will eliminate most of your debt and will have the chance to rebuild your equity. If you declare bankruptcy a few years from now, you will be starting at zero but will have less time to rebuild.

In terms of the nation’s fiscal policies, Grant suggests that the approach the Federal Reserve has taken seems to have produced a period of economic stagnation that is translated into high unemployment, especially for those young people who have just gotten out of college.

As we know, getting a job today is far, far better for your career prospects than getting your first job a few years from now. It’s like compound interest: if you start to save now and compound the interest you will do much, much better in the long run than if you start saving five years from now and compound the interest.

Enough with the numbers. How does this rule apply to other life situations, situations that are more like personal crisis management?

Take the man who dreams of being a great artist, but who does not have the talent. He studied art in college; his grades were pretty good; he set himself up with a studio; he waits on tables at a local restaurant; he has had some of his work shown in third rate galleries.

He has had just enough to feed his impossible dream, but not enough to show that his dream is going to become a viable career.

How long should he chase an impossible dream before giving up? Should it be fast and ugly or slow and ugly?

Let’s say that there comes a time when all of the evidence suggests that he is not going to live his dream. At that point, it is surely best for him to change his life-course and set out on another endeavor, one where he has a better chance of success.

Otherwise, he will continue to be a starving, unsuccessful artist. He might arrive at middle age with little or nothing to show for his efforts. Eventually it might dawn on him that he has taken the wrong path. Would it not have been better if he had spent the energies of his youth pursuing another life path.

Rather than waste his capital, that is, his talent and energies, why not admit to himself and to those who have supported his dream, that he was wrong and that he is going to do something more suitable?

Unfortunately, most of us will go to extreme lengths before we admit we were wrong. It’s easier to blame the world or circumstances.

Try another example. A woman is involved in a relationship. She doesn’t love the man and  knows that she can never marry him,  but she likes knowing that she is in a relationship and does not want to sit home alone on Saturday nights.

Perhaps when the relationship began it was all fire; now it is mostly ice. Nevertheless, her boyfriend still loves her and wants to marry her.

Breaking off the relationship abruptly will seem to most of her friends and family to be an admission of having made a mistake. She will have to answer a lot of intrusive questions. She will have to explain why she got involved with a man who she was not going to marry.

So, she decides that something is better than nothing, and that she does not want her social standing to be damaged. She holds on to the relationship, essentially wasting her time and energy on something she does not want.

She imagines that somehow something is going to happen to resolve the problem for her, but she has chosen slow and ugly.

At some point in the future her relationship is going to fail. No relationship is too big to fail. At that point she will have caused herself and her reputation much more damage, and will have to live with guilt for having deceived herself and her putative boyfriend for years.