Increased Efficiency Causes Increased Vulnerability

In the 1950s General Motors ruled the world’s automobile manufacturing industry.  GM was profitable and a prime target for union strikes.  Nevertheless, GM wasn’t too concerned about labor strikes because it had acres and acres of engine blocks, transmissions, quarter panels and wheels stored behind its factories.  If the union went out on strike, GM would hire scabs and keep on building cars with the mountainous, backyard inventory.

More importantly, GM’s mountain of parts allowed GM to keep working in the event that one of its suppliers suffered a production stoppage due to labor strikes, natural disaster or corporate bankruptcy.  Thus, GM’s huge parts inventory provided GM with a “margin for error” in case anything unexpected happened.

 

Short Selling II

For the past two months, I’ve argued that our current economic crisis was not caused by technical defects in our economic theory or a failure to properly manage interest, inflation or unemployment rates.  Instead, I’ve argued that the current economic crisis is the result of a collapse in our nation’s moral values.  I’ve argued that institutionalized immorality in government (political campaign contribution laws; deficit financing), finance (fiat money), the church (state-incorporated churches rather than real “churches of God”) and the people (no-fault divorce, abortion, and a “something-for-nothing” mentality) has degraded too many Americans to the status of greedy, unconscionable fools who’ve refined their capacity to predate and lost their capacity to produce.

 

The Moral Hazard of Selling Short

If I bought a house for $200,000 and insured it for $1 million, that insurance policy would create a “moral hazard”.  I.e., the $1 million insurance policy against my $200,000 house being destroyed by fire would, in fact, provide an incentive for me to burn my house.  Why?  Because I could never hope to gain much more than $200,000 for selling the house, but I could instantly gain $1 million from burning it down.  A “moral hazard” is something done for a seemingly good reason (to protect against destruction by fire) that nevertheless creates an incentive to do wrong (cause the fire).