Freedom to fail

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This paraphrase is from http://antonopoulos.com/2014/03/02/failure-is-an-option/

Recently, the US has been infected by the “failure is not an option” mantra, a toxic hubristic fallacy, disguised as a truism, which promotes the idea that risk can be removed from life; that 100% security and 100% control are possible, even desirable. Those who attempt to remove the possibility of failure, to de-risk financial systems, end up creating the probability of spectacular failure. By removing the option to fail cheap and fail fast, they instead concentrate risk and ensure we will fail hard, fail expensively, fail across the board.

In the 1970s the US developed a policy of forestry that espoused 100% prevention of forest fires; let’s call it “fire is not an option”. This policy resulted in the systemic suppression of small fires and eventually into very unbalanced forest ecosystems where fire is now not just an option, but a certainty of disaster. We now know that fire is a natural part of a forest’s life-cycle. Without fire, the forest floor gets overgrown, making it a source for bigger and hotter fires. When fires break out in a “managed” forest where fires have been suppressed for years, they burn so hot they turn the ground to glass. Fires that were survivable by trees are now so destructive that they denude hills and wipe out the entire ecosystem. Our financial system has become much like a poorly managed forest, harboring within it the increasing probability of a systemic and destructive conflagration.

Capitalism and entrepreneurial innovation require risk, as it is a fundamental component of business evolution. When companies are allowed to fail, their resources get reallocated in the market, just like a fire that converts sparse undergrowth into fertilizer for the next generation of trees. If instead, the failed companies are prevented from failing but are propped up to maintain the illusion of solvency, they fester and consume more and more resources while creating greater and greater risk. Eventually, bail-outs must be followed by even greater bail-outs and then bail-ins. Finally, the systemic risk of too-big-to-fail becomes too-big-to-bail and the economy suffers a conflagration of defaults. De-risking increases the risk of failure and turns localized risk into a systemic risk. If you stop the small fires, you get a fire so big it turns the ground to glass.