No More Leeches! Just Let Me Heal…

It was almost two hundred and ten years ago that the father of our country, George Washington, lay down on what was to be his death bed. The former president had fallen ill, and he requested doctors be brought to him.

Being a wealthy man and a former president, he had at his disposal the best doctors of his day, trained in the accepted wisdom and practices of his era. The accepted wisdom was that disease came from an imbalance of humors that lay within the body, and that the humors needed to be released from the body to achieve good health once again. The accepted practice for releasing these humors from the body was by bleeding.

The idea of the body being governed by “humors” had ancient roots, going back to the earliest of ancient Greek physicians. It amounted to an attempt to create an analogue within the body to the four ancient elements: Air, Fire, Earth, and Water. It was only as germs and nutrition began to be understood in the 19th century that these ancient ideas began to be dismissed as the bunk they were.

Washington however, believed in the accepted wisdom of his day, including the existence of humors that needed re-balancing. And so when his doctors came to visit him, with leeches and a variety of sordid instruments, akin to torture implements, to make him bleed from his neck and extremities, he encouraged the doctors to ply their trade. It is said that at one point, when Washington appeared to be in severe agony, the doctors asked the great general if he needed to take a break. But being the hero he was, he is said to have replied, “Apply more leaches.” And his doctors complied.

George Washington died two days after taking ill.

And so today we find that our financial system, indeed our country, has taken ill. The going theory is that the varying animal spirits in the market got out of balance, and caused a bubble. The result has been fear and panic in the marketplace. Conventional wisdom holds that the way to break the fear in the market, to re-balance the animal spirits as it were, is to have the government forcibly take money out of the hands of those clutching it for dear life, and give it to plebeians and government cronies to spend on comic books and bubble gum. This consumer spending will generate a multiplier effect, as comic book and chewing gum vendors in turn spend the money to replenish their supplies. And their suppliers spend the money again, and so on, generating a monetary velocity that will revive the economy.

The theory is bunk.

We are suffering from a lack of capital right now. This capital crunch was caused by people making bad investments in mortgage backed securities, much of which went to people who were taking money out of their houses to consume. Once consumed, that capital was gone. And those homeowners were unable to pay back their mortgages. The problem was so widespread, that there is a general lack of capital in the financial system at the current time, and it is so dire that many businesses are unable to refinance themselves, even though they represent far better credit risks than homeowners did.

The answer to this crisis, then, is not to force the patient to bleed more capital. Rather, it is to enable capital reserves to be rebuilt, and to adjust the market signals (read government policy) which caused so many to go investing in mortgages that they shouldn’t have in the first place. Giving money to government leeches, whether they be connected lobbies or constituencies hooked on entitlements, will not cure the patient. It will kill him.

Today, it is widely understood that Washington had a very curable cold, and was killed by his doctors plying their trade. Our survival is dependent on what we tell our doctors to do at this juncture. Will we, as Washington erroneously did, listen to the conventional wisdom, and grit our teeth and say, “Apply more leeches,” or will we, understanding that we’re getting worse, not better, sicker, not more healthy, have the nerve to defy the “best and brightest” in Washington, D.C. and tell them, “NO MORE LEECHES! Just let me heal…”

The choice is ours. It is not clear if we will choose wisely…

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