Keith Fitz-Gerald: The Perils of Underestimating Complexity & Mispricing Risk

"If you’re rich you get a bailout. If you’re poor you get a handout. And if you’re middle class you get left out. " That's not a sustainable way to run the system, exclaims investment strategist Keith Fitz-Gerald.

A cancer at the core of our current economy is the magical thinking, "no pain, all gain" philosophy, pursued by those running it. They are doing all they can to remove the consequences of failure from the system -- blind to failure's essential 'waste-clearing' function in a healthy free market.

Without the discipline of Darwinism, the individual actors in the system make all sorts of malinvestments that would never make sense in an efficient marketplace. But since the losses from these inane pursuits are socialized, there's no incentive to stop making them. At least, up until the point where the class who's back is burdened with paying for the socialized messes finally breaks.

This is the thing: let some of these things fail because when failure occurs you have an asset redistribution. The faulty assets are, in fact, bled out of the system. The quality assets are assumed by responsible parties. That is the law of capitalism. That’s the way it works.

So if we think back to the credit crisis and we think back to what happened in 2007 – 2008 they went screaming and yelling to congress, "Oh my goodness, we’re going to have to do this or the sky’s going to fall!" Well, the sky fell anyway. They pumped $700 billion into this, then a couple $ Trillion. Well, if the government multiplier that all these conventional economists talk about actually worked our economy should be screaming along at six or eight percent right now, but it's not.

And the reason it's not is because it's a complex system and despite all the pushing and pulling they’ve done on one end, they didn’t understand that all these other things would happen at the other end. Too big to fail? It's not too big to fail; it's too big to survive.

We have monopoly laws that we should have been using along the way but our regulators were asleep at the switch. They’re out manned, outdone, outclassed, at every turn of the road. Wall Street does not want to do anything that remotely resembles reigning itself in and it has no incentive to do so.

It sure as hell is not the free market that everybody likes to think it is. And that, to me, is extremely disturbing because they have removed the hand of risk from the marketplace and these businesses now have every incentive to screw up because they know that a) they won’t be held accountable for it and b) they’re going to get bailed out.


They have put so much debt onto this that our unborn great, great, great, great, great, grandchildren could not possibly pay this off. The only way they’re going to get out of this is to deleverage it and remove it from the system.

As an expert on Japan with deep personal ties there as well, Keith and Chris also discuss why that country is a great "black swan" candidate for the back half of 2012.

Click the play button below to listen to Chris' interview with Keith Fitz-Gerald (44m:22s):

This is a companion discussion topic for the original entry at

Evolutionary programming can tame complexity.
Steve Keen's Jubillee makes intuitive sense. (Requires kahunas.)

Self-referential model making Left Hemisphere. What we have is a cultural psychiatric problem.  

Lack of workers is being circumvented by technology. Who needs workers?

Frungible energy source needs funding. What about focused beam fusion? I've got a better Idea. Why don't we fund the Banks? Print more paper. (See above, self-referential Left Hemisphere problem. Hall of mirrors effect.)

You want me to invest? Have you seen the state of the Markets? They are corrupt, rigged. Not a chance. Not even after the Crash because "Economy" will no longer exist, either because we sink back into the swamp or because the opposite has happened and money has become detatched from other peoples labour due to automation and cheap energy.

Perhaps both. The bi-farcation of humanity might become complete. See my Science fiction tale.

Good discussion about the time value of Money as it relateds to manipulated interest rates. But can someone explain to me the time value of "real money" ie. Gold or Silver. Sorry if it's a dumb question, but I'm trying to understand all this stuff.

I was a little offended by Mr. Fitgerald's comment about Greece.  Let's see, the BANKS sold Greece toxic mortgaged backed securities (wrapped up in AAA rating), then the BANKS bet against the very same, self instruments they sold, and now, of course, it's Greece's fault!
Instead of commenting Greece should be kicked out of the Euoro, the comment should have been Greece should kick out the BANKERS.