Understanding Government Action: An Investment Essential

So much depends upon how government handles the current credit market crisis.

There are so many opinions by those reaching far out of their "happy zone."

Common Mistakes

The most common mistake made by investors is to take a simple heuristic of behavior and apply it to government action.  Here are two examples:

1. All politicians are evil, venal people who will do anything for a vote or a contribution.
2. When a policy is developed, it represents a single, rational analysis of a problem, with a specific objective and motive.

These interpretations are popular among students entering their first course in Political Science.  Even the most jaded students rapidly learn that the issue is a bit more complicated.  Students who do not understand get a "D".  Investors who do not understand lose their money.

Those who have never taken the course, including most pundits and many investors, have not gotten the message.

A Simple Test

Many readers watched, in real time, the process of coalition building that resulted in passage of the "rescue plan" formerly known as the bailout.  The reasons for supporting the plan were many and varied.  None of the legislators wished to be associated with "bailing out Wall Street at the expense of Main Street."  Yet the bill passed.  The lesson should be that successful legislation requires a buy-in from many, including those who question the initial concept.

The Movie Test

We know that many people follow simple heuristics because of movies.  Here is another test.  Go to see "W".  Pay special attention to the scene that most will find boring-- the various reasons that members of the Administration found convincing in the decision to embark on the Iraq War.  Pay special attention to Colin Powell and the "OK" sign from Karl Rove.

We observe with dismay the tendency of people to learn about government from movies.  Do they think that action films accurately portray local police forces?  Get real!!  Nonetheless, these movies have power.  So if and when you watch "W" please take a moment to think about the reasons for going to war, noting the key point.

There was no single reason!  Policies often result from many people with different viewpoints agreeing on a policy for widely disparate reasons.

Conclusion

Investors can gain a significant edge in a very easy way.  You only need to understand current policy.  It is not just investing in banks.  More importantly it concerns developing an actual trading market in mortgage securities, as we noted here.  Fed Chair Bernanke emphasized this again today, but no one was really listening.

Comments

[Smarty_Pants:]

“Now, here, you see, it takes all the running you can do, to stay in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”

The Red Queen

2008 Oct 21 03:00 PM

[moonbat1775:]

' "If you want to get somewhere else, you must run at least twice as fast as that!” "

One reason I hate inflation.

Cry out to God, you widows on fixed income and let Him avenge you on the fractional reserve bankers.

2008 Oct 21 03:18 PM

[Smarty_Pants:]

"Have more than thou showest; Speak less than thou knowest."

William Shakespeare, 'King Lear,' Act I, Scene iv

2008 Oct 21 04:20 PM