In defense of fear

Franklin Roosevelt famously said "the only thing we have to fear is fear itself"

Might've made a great pep talk at the depths of the Great Depression, but it's lousy reasoning.  There are always plenty of things to fear.

Of course, being down on fear seems to be what the cool kids in class are into these days. Take this sunday newspaper columm.

Now President Obama has joined the bandwagon.

 our government made decisions based upon fear rather than foresight.....

Perhaps in the relaxed light of today's hindsight, Bush & Cheney made prompt decisions which we are not fully satisfied with now. Then again, when lower Manhattan was covered in ash Professor Obama was nearly a thousand miles away deconstructing the Consitution for his pupils. 

Fear is an acknowledgment of reality.  When we describe someone as "fearless", often it is a synonym for "foolhardy".  Of course, an absence of fear can yield inertia as well as impulsiveness. One who lacks fear may get smug, arrogant or fall into the trap of "paralysis by analysis" since the perceived danger seems far off and the discomfort of an effective response quite immediate.

The Obama team may argue our foreign policy was driven by fear. But in its most controversial aspect--the war in Iraq--it is hard to argue the ultimate decision was one made rashly or impulsively, as the run-up to war was lengthy and deliberate.    

Revisionism by the President today will not change the fact that among those who voted for war were  Joe Biden, Harry Reid and Chris Dodd.  . Does the President suggest these "leaders" are easily frightened?

No. this is a rhetorical flourish designed to appeal to those in the chattering classes who think sleep deprivation of a terrorist is a brilliant strategy grounded in behavioral science when a Democrat uses it, and is a descent into unspeakable barbarity when it is employed by a Republican.

Let's face it. President Obama is eager to trade in the currency of fear when he thinks it will buy him something he wants.

Consider the stimulus bill 

Obama painted a bleak picture if lawmakers do nothing.

 

In an op-ed piece in The Washington Post, the president argued that each day without his stimulus package, Americans lose more jobs, savings and homes. His message came as congressional leaders struggle to control the huge stimulus bill that's been growing larger by the day in the Senate. The addition of a new tax break for homebuyers Wednesday evening sent the price tag well past $900 billion.

"This recession might linger for years. Our economy will lose 5 million more jobs. Unemployment will approach double digits. Our nation will sink deeper into a crisis that, at some point, we may not be able to reverse," Obama wrote in the newspaper piece

 

 or what his allies say about global warming.

Now it is a ticking time bomb that President-elect Barack Obama can't avoid

Hmm, can we waterboard an oil refinery and get it tell us how to stop greenhouse gas production?

No, it appears some fear is more equal than others.

The sad thing is that if one argues American's foreign policy over the past decade was driven by fear, our economic system was marked by the removal of fear. Which removed accountability and restraint.

I turn to Robert Rodriguez's prescient article in the summer of 2007.

My talk today, Absence of Fear, is a follow up and expansion of the Special Commentary section that appeared in my March 31, 2007 shareholder reports. It will focus on the concept of RISK since there appears to be little concern about risk in the financial markets currently. My goal is not to scare or sensationalize, but to get investors to consider various risks and ask the basic question, "Am I being sufficiently compensated for these apparent risks?" ..

We are concerned that, after many years of an excessively easy monetary Fed policy, a bubble of massive proportions has been created in the housing market. Many experts believe that the housing cycle is at or nearing a trough or at least is at a stable level. We are not of this opinion. We do not believe you inflate prices and demand over at least a decade and then this over stimulation is corrected in barely 18 months. We are of the opinion that this bubble has infected many areas of the financial economy. I will detail more of this in the fixed income portion of my speech.

This article continues to describe the various iterations of the bubble and its bursting. But one thing is apparent. None of the participants were sufficiently fearful of the market. Home buyers assumed prices would increase forever. and that the refi window could never close. Mortgage brokers assumed they could always sell their paper. Rating agencies assumed that A paper circa 2005 was like A paper circa 2000.  Holders of mortgage bonds assumed their losses could always be covered by credit default swaps.  Rodriguez points to one systemic problem built into the process that turned out not to remove risk, but to conceal it.

We are of the opinion that the distancing of the borrower from the lender has contributed to the development of lax underwriting standards. Each participant, in the securitization/origination process, takes their ounce of payment, but no one truly worries about the underlying credit quality since the loan will be sold.....Finally, the securitization market and the multiplicity of products that have been created have never been truly tested in a major credit contraction like that of 1990-94. This is because most of today's securitization products did not exist back then

(Note: Evidently word of this information failed to reach Banking Committee Chairman Dodd at his campaign HQ in Des Moines)

Warren Buffet is credited with the line " be greedy when others are fearful and fearful when others were greedy".  Seeing people lose their homes in the midst of the great real estate bubble I fully bought into this myself in the past decade. Alas, the entire financial economy pushed fear to the exits in the headlong pursuit of profit. In trying to create mechanisms to diffuse risk, they encouraged more of it.  

And lest this be thought of as an anti-capitalist rant, the politicians who brought you the Community Reinvestment Act  had no fear at all that our economy could absorb a virtually unlimited amount of subprime lending without adverse results. And the politicians all prided themselves with having a "light touch" as to regulation 

What would have happened if our private sector economy had been as driven by fear in the past decade as our foreign policy?  I would suggest we wouldn't be facing the debacle we stumbled into because we lacked fear.

President Obama wants to correct this situation. He wants to banish both greed and risk from the commercial marketplace.  There is an unpleasant word for this. though.

Socialism.