She argues that America is unique in its willingness to let people and companies fail, but also in its determination to let them pick up after the fall.
Washington, DC -- (ReleaseWire) -- 04/24/2014 --Nationally Syndicated Financial Myth Busting Radio Show with Host Dawn Bennett, CEO of Bennett Group Financial Services, LLC, on April 13, 2014, interviewed Megan McArdle, author of the new book, "The Up Side of Down: Why Failing Well is the Key to Success."
The show airs live on www.WMAL.com each Sunday at 11 am EDT. It now has over a year’s worth of achieved interviews for listeners free on-demand at http://www.financialmythbusting.com.
Dawn discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included Rock Legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN as well as take podcasts on the road and forums for interaction. The show is a great complement to Dawn’s monthly investing seminars that take place at Tysons Corner in McLean, VA, where she discusses investing.
Megan McArdle is a Washington-based writer and columnist for Bloomberg, where she covers economics, business, and public policy. Her work has also appeared in the New York Times, the Wall Street Journal, and Time magazine. McArdle has a new book titled, "The Up Side of Down: Why Failing Well is the Key to Success," where she argues that America is unique in its willingness to let people and companies fail, but also in its determination to let them pick up after the fall. Now, failure, Megan believes, is how business and people learn as long as you learn to harness the power of failure.
Here is the interview:
Q: We seem to live in a country where everything is shaped by a celebratory culture in which every child plays in a soccer game, win or lose, they get a trophy, or a man's first campaign speech makes him qualified to get elected to president twice. I'm sorry to be a cynic, but we don't seem to be celebrating the benefits of failure in the U.S. We just seem to be rewarding inadequacy, even when it comes to economic terms, subsidizing failure. Do you see that?
A: “I think that we have a country where the descendants of people who saw that things weren't working out at home picked up and they crossed an ocean. If things weren't working out there, they picked up and crossed a prairie, and we've historically been very good at first letting things fail. We're also really good after people or companies fail, at helping them pick themselves up again.
“My great observation of life is human beings obviously respond positively to praise. They enjoy hearing that they're talented and smart and so on, but after praising anybody who really shouldn't be earning it, then they end up, when difficulty shows up, they almost collapse. They're so demoralized by their failure, this is my observation, they'd rather cheat or not admit it than risk failing again. So, I'm wondering why bother learning or working hard when there are never any obstacles to begin with?
“This is absolutely a problem. It was observed noticed that people who were successful tend to have high self-esteem, and they confused that with cause with and effect. ‘Oh, well, other people would be more successful if they had high self-esteem,’ but, the successful people had high self-esteem because they had done something that made them successful. When you praise people for accomplishing things that aren't really accomplishments then they don't learn to connect cause with effect. They don't learn to say, ‘Okay, well if I do this, if I work this hard, I can get this.’ Instead we praise them often, right? ‘Oh, you're so smart. You're so pretty.’ We're praising them for qualities they don't actually control.
“So, it's actually really dangerous, because then in their future lives when they face challenges and setbacks, they're not prepared. Instead of having learned, through the process of earning praise, having learned to achieve and to overcome setbacks, they just assume, ‘Well, I don't know what actually gets me praise here, so I'm paralyzed and I'm going to give up.’
Q: I think our political culture too is just falling into this trap. Obamacare is not working, it’s not a success, but the White House thinks its job is to spin this program into some type of decorated victory. You would think at this stage that they should be fighting for the U.S. government to be free to tell us that it isn't working so that they can correct the problem and move on. It’s like Obama knows this is a mistake, but he's just afraid to own up to it.
A: “There are three key steps to dealing successfully with failure. First of all, to prepare for it, to understand that in order to succeed, you have to take risks and then, unlike in the movies, failure is an option.
“Second of all, then, to recognize that you failed, and third of all, to move on. That second step, so many people say, ‘Well, obviously,’ but people don't want to recognize failure. You'd be astonished at how often people simply fail to recognize what has gone wrong, that anything has gone wrong, and this goes for everyday.
“It's everything from people on plane crashes to people in failing businesses, yes, there's a huge psychological barrier to admitting that you have actually made a mistake, right? Because failure hurts, and it has to in order to make us stop, right? If it didn't hurt, we would just keep doing this stupid thing.
Q: So, is President Obama afraid of pain, or is he just being coy for political reasons, or is it his self-reflection, really just self-delusion?
A: “Well Obamacare is President Obama's signature legacy, right? That is what he is going to be remembered for, and so, obviously, he is incredibly invested in having it stay. So part of it is simply the psychological thing that we all have of not wanting to admit that something's gone wrong, but there's also this in politics, insistence can often be reality. If he simply keeps proclaiming that it's working, then maybe everyone else will have to believe it.
“So, the attempt to avoid the psychological pain of recognizing that something you really wanted to do hasn't worked leads people to shelter themselves by pretending that the failure hasn't happened and this is incredibly dangerous. That's really how GM got itself into its trouble, how people in failing relationships often waste extra years. People double down instead. When someone is confronted with a really bad loss, that's when they are most likely to invest more, denying the failure and trying to recover that loss even though that's the most dangerous thing they can do.
Q: Let's move from Obamacare to banks. One of the most notable failures of late is the collapse of several big banks, and the government deemed most of them too big to fail. What has your research told you about this episode? Would our economy have benefited from letting these banks declare bankruptcy and start over, or was Washington, DC right and they had to be bailed out?
A: “In terms of the bank bailouts, in my opinion, they had to be bailed out, in part because we didn't have good procedures for putting these banks into bankruptcy, and that goes back to step 1, you have to understand that failure is an option, and you have to prepare for it. The problem was that for years as a financial journalist I was reporting on something called The Great Moderation which was this idea that regulators had gotten so good at their job that we basically just couldn't have financial crises anymore, and that was a kind of crazy idea that was really common. That meant that when the crisis hit, and this is what happens if you assume that it can't happen, when the crisis hit, we just weren't in any way prepared for the fallout, so we had to take desperate measures, which in this case included bailouts, simply because no one had prepared the markets or the legal system.
Q: The too big to fail were bailed out, but are they now prepared? The way I see it, they aren't. We've got issues with mortgages and so many issues. The only thing that we've done is continue to supply liquidity to the system, but it doesn't seem like we've made any policy changes to prepare us for the next great crisis?
A: “Since then we have not, in many ways, prepared the way I would like. We've done some good things, for example, banks are now holding more capital, and, as any financial specialist will tell you, the best way to prepare for a financial setback is just to have more reserves. That's all to the good, but then we spend a lot of time attaching things that weren't really all that related. For example, we attached a rule that regulated the interchange fees that credit card processors can charge merchants. It's that 1 to 2 percent fee that they take out of the top of any transaction they do.
“Dick Durbin from Illinois thought that was too high, and so they attached a bill to that. Completely unclear what benefit this was supposed to provide, but nonetheless they went ahead and did it, rather than making the banks safe, it turned into this omnibus, ‘hey, everything that I've ever thought about the financial system, let's load it in,’ which meant that we didn't spend enough time on the parts that were really necessary, which is how do we make sure the next time a bank fails, instead of having to give them a $1 trillion worth of bailouts, we have an orderly resolution system in process, the way that the bankruptcy code has an orderly resolution for companies that can't pay their bills.
Q: What about when it comes to companies?
A: “So bankruptcy code is extremely good at helping companies reorganize, at helping people get back on their feet. But in the last 20, 30, 40 years, we've gotten to this place where we're increasingly reluctant to say, ‘You know, things go wrong sometimes.’
“So, a similar story occurred in Detroit, where two of the three major American automakers effectively collapsed in the last year of the Bush administration. Now one company was saved and is now owned by Fiat, an Italian automaker. I'm wondering if we could rewind the clock and play this thing again, is there a chance Americans could still buy an American-made Jeep?
“They should've lined that up well in advance, but Rick Wagoner, who has been the CEO, simply refused. There's an argument that can be made that they waited too long and because the financial crisis had totally frozen up credit, they needed such a big bailout -- about $50 billion worth of capital to do the transition -- more than any bank was willing to lend at that point, that maybe the government needed to provide financing.
“That's very different from what the government did. Bankruptcy courts are very good at resolving industrial concerns and have a lot of experience at it. The government could've made a tidy little bit of money doing what banks do, stepping in, because they had capital, and just lending a normal debtor-in-possession financing. Instead, they used the money to buy part of GM, to start re-ordering the lines of the creditors so that the union health benefits fund got more than a lot of the other creditors. Taking it from other creditors who ordinarily would've gotten more money. I think that absolutely you can make an argument that maybe we needed to do the financing. We did not need to step in and orchestrate this crazy, elaborate process of deciding how GM would be run for the next five years, which is what we ended up doing. It ended up costing the U.S. a lot of money.
Q: There's a lot of discussion that the U.S. dollar is being debased and will eventually just go away. That would be a massive bankruptcy for the United States. Do you think that we're prepared for anything like that?
A: “I think that the bigger issue is the dollar is like a canary in a coal mine. When it goes down, it's a symptom of something else that's happening and not always something bad that's happening. For example, China spends a lot of money trying to make our currency expensive relative to theirs, because then it’s basically an export subsidy for their exports.
“So if the dollar went up a little bit because China wasn't buying so many dollars, that might actually be good. It would even out our exports, save some American jobs, and correct a lot of the crazy foreign reserve imbalances that you're seeing build up around the world. On the other hand, the dollar is a symptom that we're running 5 percent budget deficits every year. We can't get a political consensus on how to actually cut and restructure our way into fiscal solvency. People have stopped believing that the U.S. is going to repay those debts, or stopped believing that American companies are going be making good products and that America's a good place to invest. That is going to be catastrophic, and we are absolutely not prepared for that to happen.
Q: Don't you think they aren't believing it? China used to be the No. 1 holder of U.S. Treasury debt, then was Japan. Now, they're No. 4, 5 on the list. Today it's the American taxpayer who's the No. 1 holder of U.S. Treasury debt. Isn't that already a sign or a symbol that they are losing faith that we might get paid or they might get paid back in funny money?
A: “The Fed has been taking extraordinary interventions over the last few years, trying to keep employment up and trying to keep the country from sliding back into recession. It can be argued whether what they've been doing is good or bad, but ultimately, the bigger risk to the American taxpayer from that is not that they're so much that they're holding their own debt so to speak. That would actually be fairly not risky, right? We can decide what we want to repay ourselves. The big risk is that there's inflation or some sort of financial instability that comes out of that.”
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About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program on www.WMAL.com called Financial Myth Busting http://www.financialmythbusting.com. She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett or firstname.lastname@example.org