If you can't guess from my previous dozen posts in the last week, I'm referencing what's going on in our financial system right now and the bailout bill.  One of my biggest arguments with much of the government intervention in the past year and in particular the bailout in front of Congress is it attempts to artificially prop up companies who would otherwise have failed.  There are many pundits that will talk about how it's in our interest to support these companies because it's needed to help the economy recover, keep us from loosing jobs, etc.  No, No, No, let me explain why failure is not just important, it's critical for a healthy, long-term recover.

To use an analogy, for several decades our forest service took on the policy of trying to prevent ALL forest fires, both big and small.  Forest fires are bad, right?  What they didn't consider in this policy is forest fires are part of the natural cycle.  They cleared out underbrush making space for regrowth in the forest, and in fact several species of trees actually require fire as part of their natural reproduction process (seed cones open in a fire).  As this policy continued for decades it was discovered the forest fires got much larger, more damaging and the general health of many of our forests began to decrease.  Within the last decade or two this policy by the forest service has been reversed and it is now policy in many cases to proactively set fires in some forested areas.

Recessions and tough economic times serve the exact same purpose in the corporate space.  The weak companies with failed models are cleared out and smaller more nimble competitors move in to fill the void, recreating jobs and helping the recovery.  Yes it's painful for a short time, especially if you're one of those people that works for a failed company but without this process you never get a true economic recovery. 

Look no further than our current auto and airline industries for proof of how critical this process is.  We propped up large, slow moving automakers and airlines who's business plans simply don't work under the guise, of it being good for the nation.  We've done this for decades and it has created two entirely dysfunctional industries.  Had Chrysler years decades ago, we almost certainly would have seen smaller US competitors move in to fill the void, who would have been more nimble and forward thinking and able to compete with the foreign companies who instead blew past "The Big 3".

This is extremely relevant to the financial, lending and real estate industries of today.  No one will deny they are in a state of disarray right now, but do we want to attempt to avoid the pain and keep them in a perpetual state of disarray or do we want to take our medicine and have a true recovery and a return to a healthy market?

See also: Why I am so Livid About the Bailout