The Yellowstone Effect

In yesterday’s Wall Street Journal, Mark Spitznagel draws an interesting parallel between forest management and economic management.

English: A fire in Yellowstone, Wyoming, Unite...

We learned that putting out small fires can lead to huge fires.

Suppressing fire, creating the illusion of fire protection, leads to the wrong kind of [forest] growth, which then invites greater destruction. About 100 years ago, the U.S. Forest Service took a zero-tolerance approach to forest fires, stamping them out at the first blaze. Fast forward to 1988 when a massive wildfire at Yellowstone National Park wiped out more than 30 times the acreage of any previously recorded fire.

What obviously occurred was that the most fire-susceptible plants had been given repeated reprieves (bailouts, in a sense), and they naturally accumulated, along with the old, deadwood of the forests. This made for a highly flammable fuel load because when fires are suppressed the density of foliage is raised, particularly the most fire-prone foliage. The way this foliage connects the grid of the forest, as it were, has come to be known as the “Yellowstone Effect.”

A far better way to prevent massively destructive fires is by letting the fires burn. Human intervention in nature’s cycles by suppressing fires destroys the system’s natural homeostatic forces.

Strangely parallel to the Yellowstone catastrophe was the start of the federal government’s other fire-suppression policy with the 1984 Continental Illinois “too big to fail” bank bailout. This was followed by Alan Greenspan’s pronouncement immediately after the 1987 stock market crash that the Federal Reserve stood by with “readiness to serve as a source of liquidity to support the economy and financial system,” which heralded the birth of the “Greenspan put.” The Fed would no longer tolerate fires of any size.

I remember looking up in the night sky and seeing the haze from the smoke of that big Yellowstone fire.

7 thoughts on “The Yellowstone Effect

    • Thanks for the comment.

      Spitznagel’s point is that the natural ‘fires’ of the free market won’t destroy everyone’s homes, but suppressing those natural fires with intervention leads to bigger fires that could.

  1. LOL. Better than Colbert. 🙂

    We learn from our mistakes. One mistake was failing to let Brookesley Born regulate the derivatives market that was working in the shadows. But Greenspan’s crush on Ayn Rand led him to encourage Congress to declaw the Commodities Futures Trading Commission in 1998, and Ms. Born resigned. (See the PBS Frontline special called “The Warning”).

    The best source of data on the 2008 financial collapse is the Senate’s investigative report at:

    Click to access FinancialCrisisReport.pdf

    • Marvin – Explain how ‘Greenspan’s crush on Ayn Rand’ (which I’m assuming is a snarky way of saying Greenspan’s belief in free markets) is consistent with him using to the Fed to bail out people who took risks. It’s not even close. Again, capitalism without losses removes prudence.

      Even your Senate report identifies the increasing propensity for financial market participants to take risks as a contributing cause of the crisis, and that is consistent with established pattern of non-free market interventionism Greenspan took to bail out things deemed ‘too big to fail’ by him. If you think there’s a good chance government is going to bail you out (heads I win, tails you lose), why not take a risk? That’s actually not taking a risk. That’s just responding to the incentives of a moral hazard.

      • I certainly agree that the banks deserved no bailout. The only reason for the bailout would be to protect all the retirement savings and pension plans that bought the falsely advertised AAA securities. If the market were properly regulated, people would have a better idea what they were buying, instead of being defrauded. I’m sure you get that.

        And Greenspan actually knew Ayn Rand personally (the “crush” was my historical rewrite, but he was attracted to her ideology).

        • He may have been attracted to her ideology, but he didn’t fully practice it. It becomes difficult to say ‘tough cookies’ when you’re in charge and there’s political feedbacks. You’ll be remembered more fondly for trying to ‘do all you could to help’, even if it didn’t work or caused a bigger disaster, than letting something go under.

  2. If “people” didn’t understand what they were buying, why did they buy it? The answer is that they were greedy. So, the “greed” worked both ways – the sellers and the buyers of the re-packaged securities were both greedy. It’s an established fact that when markets heat up, “investors” turn into “gamblers.” People’s emotions take over – they see “everybody else” making profits (really paper profits) and they don’t want to miss out.


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