Self-destruction and the economic downturn

Do you know how Eskimo hunters in the Arctic killed dangerous wolves? 

They didn’t.  The wolf self destructed and eventually killed itself. 

According to folklore, when they wanted to kill a wolf, the Eskimos took a knife with a very sharp blade and coated it with a seal’s blood.  They let the blood freeze and then coated it over and over until the blade was completely covered in frozen blood, like a big popsicle.  The Eskimos then left the coated knife upright in the snow and lay in wait. 

A wolf’s sharp sense of smell drew him towards the knife.  He would start licking the ‘popsicle’ in eager anticipation of some tender, juicy meat.  To the wolf, blood represented food.  He was seduced by the taste of the seal blood and wanted more and more.  Eventually, his craving became so overwhelming that he failed to notice the sting of the blade as it cut his own tongue.  He could not distinguish between his blood and the seal’s because his insatiable, carnivorous appetite sent him into a feverish cycle of licking and biting. The desire for meat fed the wolf’s excited frenzy.  He was unaware of his own pain and growing weak state until it was too late.

This story of self-destruction is a good illustration of the current economic crisis. 

Banks represent the wolves.  They are now paying the price for their frenzy of illogical, risky decisions and insatiable, unbridled greed for wealth and profit.  They have self-destructed.  They made the choice to ‘lick the knife’ and not stop and so they have no one to blame but themselves.  If you build a house of cards and the wind blows, you should anticipate that the cards will fall.

The credit crunch was triggered by rising US interest rates and subsequent defaults by people on their subprime loans. Subprime loans are loans to clients who have poor credit ratings or no credit history.  Are the banks really surprised these people defaulted?  With such a rocky foundation, what did they expect?  Like the wolf, bankers have not been able to distinguish between logical, timeless economic principles and their desire for high profits.  Their greed, complicated financial dealings and the subsequent loss of trust and consumer confidence have now sucked others into this frenzied financial whirlpool. 

Even though I am a Chartered Accountant, I find that the intricacies of options, swops, derivatives and complex financial structures blow my mind.  Time Magazine says that in 2003, successful investor Warren Buffett, ‘called these derivatives – which it turned out almost no one understood – “weapons of financial mass destruction”.’  If you put money into complex financial structures that are difficult to understand, what do you expect will happen? 

Robert Reich, of the University of California at Berkeley, said: 

Some greed is necessary to keep capitalism going. But too much greed will bring it down.  Greedy bankers have been running a giant con-game. They figure if they can persuade investors to buy something that’s actually worth nothing, it might appear to be worth something, which lets them persuade others to buy even more, because – after all – by this time lots of investors are buying it.

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