The Linux Extremist

The Bank of England cut its base rates yesterday from 5.75 to 5.5 percent. Stock markets rose. The “alleluia” chorus in the newspapers was near universal. Additionally, President Bush just announced a deal by which mortgage lenders would “voluntarily” keep rates down for subprime borrowers. Those panicky, nervous herd animals we call investors moved in a positive direction.

I, however, am not overjoyed. This is not just because I’m a professional curmudgeon, who sees a dark cloud in every silver lining. Working in technology does give one a dim view of humanity, and one of the things I’ve discovered is that it’s very bad to let stupidity go unpunished.

The subprime crisis is stupid. Stupid is a harsh word, not one to be bandied about lightly; it doesn’t just indicate a lack of intelligence, there is a hint of willful lack of understanding too: “I’m going to do what I want to do even when the facts are against me”. But the subprime crisis is a product of just that: banks loaned money to people who hadn’t a hope in hell of paying it back. Now they’re screaming because, ta-da, they woke up and found out that they were never going to be repaid. They spread the poison through the financial system by selling it bundled with other assets; now there is a lot of pain in trying to figure out who is going to pay the cheque.

In steps the Bank of England and Uncle Sam - don’t worry, you fools, we will cut interest rates and thus ease the hurt and make it more likely that you will get something. The bankers heave a sigh of relief, they won’t have to forego all of their bonuses this year, all they have to do is buy a Ferrari instead of an Aston Martin, and get a suit off the rack at Gieves and Hawkes rather than have one custom made. All is well.

Until the next time; as someone in the internet industry, I remember when a mistake at this level of idiocy was last committed, namely at the time of the dot com boom.

Let’s put into context how asinine that was. Boo.com was a leading example; those who have read the book (”Boo Hoo”) written by its sublimely ridiculous founder Ernst Malmsten, will recall how they met with investors and were asked, “What does your market research say?” Malmsten thought that was a daft question, because market research was something one did when one “wanted to market a new brand of toothpaste”. The internet, in his view, relied more on “instinct”. Giving this man money was the financial equivalent of having a vasectomy performed by a lunatic with hedge clippers, but he got $130 million to waste.

I was part of a lesser failure. I worked for a dot com in the Netherlands and was promised $1 million in share options. Unfortunately, the company had a burn rate of $250,000 per month. The directors lived like oriental satraps with lovely offices on the top floor. They had secretaries obviously hired from the finest modelling agencies in Amsterdam. However, the product that was produced was simply not viable. Funding dried up, and the company died.

The Bank of England and the Federal Reserve cut interest rates around 2001 to stave off some of this pain; fortunately, however, it was not an injury they could eliminate altogether. Venture capital for this nonsense disappeared. The foolish companies that had business plans based on hot air have largely been consumed. Internet based businesses are increasingly subject to the same rigours and disciplines as bricks and mortar ones. Stupidity was punished, and we were all better off for it.

The invoice for subprime lending has come due. The chickens have come home to roost, cackle and excrete all over the yard. The worst message that could be sent to the lenders is that they will always have a sugar daddy to count on.

The sugar daddy may indeed do more harm than good; after the stock market crash of 1929, Herbert Hoover was advised to let the pain cycle through, because market forces, and the creative destruction they entail, would ensure that the economy would be more efficient as a result. Hoover chose to intervene and stop the pain; the result, broadly speaking, was the Great Depression.

President Bush and the Bank of England will hopefully take heed . As Herbert Spencer said, “The consequence of shielding men from the results of their folly is to create a world full of fools.” With wisdom can come much grief, and with much grief can come wisdom. Hopefully the inevitable pain can be front loaded, the necessary lessons will be learned, and we can all carry on.

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