This Time, We'll Learn the Lesson 33 comments
James Picerno
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Seeing the world as chaos, devoid of rules or logic, when the capital and commodity markets go into a tailspin and the economic outlook is grim is a potent temptation. But it's a mistake to think that order has run off the rails.
The problem has been hubris — an excess of hubris. The comeuppance is now upon us, and the process of a return to modesty, humility and a healthy respect for risk in money management is in full swing. This comes as a great shock to many investors. But to say this is something new is to ignore history.
Financial calamity is always lurking. As Kindleberger put it, financial crisis is a "hardy perennial." Sometimes it's kept at bay for years, even decades, but eventually the beast returns. Painful as this recurring truth is for those who must live through it and watch hard-earned savings wither, there can be no other path.
Don't misunderstand. The pursuit of progress in economics and portfolio management must continue, and will continue. We're not doomed to sit on our hands and let the financial gods do what they will with us. We can and will advance the cause of intelligence on these fronts. Indeed, we've learned much over the past 100 years. Yet greed and fear are immune to knowledge and wisdom, much as the common cold is resistant to the miracle that is medical science.
But the system — the economy, the markets — imposes its own discipline when self-restraint has given way, as it invariably does at some point. Imagine an alternative universe where companies and economies grow to the sky, risk is always rewarded. At some point in this fairytale world everyone would be a day trader, working out of 80,000-square-foot homes and driving SUVs plush with surround sound audio and widescreen TVs.
Such a world, as enticing as it may seem on a personal level, would collapse of its excess. Someone has to run the farms, build the bridges and figure out how to build small, more efficient computer chips. Having plumbers and bus drivers, in short, comes in handy on a regular basis.
The discipline that takes leave at times is returned to by force in the form of economic and financial turmoil. Stability is inherently unstable, as Hyman Minsky famously warned. The inevitable instability isn't pretty, nor is it desirable per se, but ultimately it's necessary to keep us from turning into the financial equivalents of overweight blimps a la the animated movie WALL-E.
One might imagine that the pummeling of investors in the 2000-2002 collapse of the tech bubble would have reacquainted Wall Street and the world generally with the principles of humility and an appreciation of risk. For a time, the lesson was learned (relearned actually), but it was fleeting. This time, however, the lesson will be learned.
We're all guilty in some degree of ignoring the excess that preceded the correction that now bites us all. We're all guilty in some degree of looking back at "history," as defined by 5 or 10 or even 30 years and concluding that risk never looks uglier than this, or that. We're all guilty in some degree of failing to look back over much longer periods of history, at the experiences of different countries, and considering how bad it can really get and what that implies for risk management. We're all guilty in some degree of assuming that a correction would be fairly brief and that it would create a buying opportunity next Thursday, an event that would reap juicy rewards within weeks, or months or certainly within a year. We're all guilty of assuming that the massive rise of debt, the non-stop spending by consumers, and the general embrace of the more-is-better paragon would be a costless affair.
Yes, some of us were warning of the dangers for some time. What's more, some have studied the past deeply in an effort to understand the full range of possibilities in the money game. GMO's Jeremy Grantham is one example. But such warnings generally fell on deaf ears. That's no great mystery. Optimism comes easily to the human mind. Meanwhile, preparing for the apocalypse — even modestly or just thinking about it — is always easy to postpone.
We've all been disabused of these and other short-sighted and historically shallow notions. No, few of us have ever seen anything like what we're experiencing now. But that fact, along with the reality that almost no one was expecting the risk blowback that now afflicts the planet, was a warning sign — a warning sign that a reintroduction on a mass scale to the nature of risk was near.
The future is rushing toward us, and it's a future with a lot less finance in the economy. For some time now there has been too much finance in the world. It was naïve to think that the industry, and all its excess, could keep growing indefinitely. But that has stopped, and the process will continue reversing in a big way for a long time. The future will deliver few mutual funds, fewer ETFs, fewer over-sized egos in money management, to name but a few examples.
It's all very painful, of course, partly because the biggest bull market of all was the explosion skyward in expectations. The hardest task is coming to terms with a future that looks radically different from the past. But rest assured, the pain too will be fleeting. When the last man has sold; when it looks like nothing could go possibly right again; when darkness appears infinite; that's when the rebound will commence in earnest. It'll be quietly, mysteriously, and almost no one will see it. But it will come. Meantime, we're all booked for a lengthy session in the Economics Re-education 101.
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This article has 33 comments:
Try to think outside the box. Never mind, it looks like the box may be shattered soon.
We rose to world leadership based on hard work and a science-based, engineering-based, manufacturing powerhouse economy. We are crashing because our economy's leaders and some of our populace found it convenient to believe that we can prospsper merely by financial alchemy, without the inconvenience of hard work. Unfortunately, that mistaken belief still guides our policymakers, and their flailing attempts to restore a fundamentally unworkable system will lengthen the period before we readjust to reality.
When we eventually rediscover the old fashioned notions of hard work, savings, and responsible levels of consumption, we shall again become economically strong.
There is nothing dishonest about the banking system. No banker is responsible for the consequences of your trading decisions, you are. Nobody forces you to use money, you can use cookies or bars of copper if you prefer them, and can find anyone else who does. The article is correct and cites the correct authorities in the matter, Kindleberger and Minsky. Financial crisis predates our present banking system and it will outdate this crisis and your ideological patent medicine remedies. Its underlying cause it simply the freedom of other men to make mistakes, and its possibility can't be removed while other men are free. Isn't worth trying, either.
Economic security is a round square and a misunderstanding.
Economy consists in readapting to the actual state of the world, which changes as men act and succeed or fail in their plans and predictions.
Security consists in the desire to not adapt to anything, to just keep doing what one did last, expecting the same results.
You flat cannot have both, any more than you can make 2+2 be 5 or 3 because you would prefer it.
Soon, the western government will have to provide some "restraint" to the notion of free-markets. If free markets is left to it's own device; it will canibalized it's own siblings and the young and the unborn will have no protection at all when logic goes out the window (big companies devouring each other while small to medium size companies which are needed for future growth will prematurely go bankcrupt while venture capitalism or entrepreneurship will not be able to hatch at all).
The govt will have to provide some guarantee to stock market investors against company bankcrupcies in order to arrest this temporary panic turning into semi-permanent complete loss of confidence.
It is much harder to find ways to restraint greed since nobody including the government will want to stop a bubble while the going is getting better.
That's what they said after the Great Depression... They had learned all about the evil side of credit gone wild.... Credit, like nuclear power, has a good side and a bad side...
Sure we did... We learned all sorts of lessons after the Great Depression...
Like funding FDIC at a one percent level and keeping your fingers crossed there will not be a run on the banks, because you don't have enough money to cover the losses...
Oh! Social Security... Let's not talk about that...
Yes James. we've learned that history does repeat itself.
It was interesting... After the U.S. Government shilling of the exchanges yesterday in the last 15 minutes, I was thinking to myself today... Who will spread the rumor for Bush and Paulson today in an effort to lift the markets... Bloomberg? CNBC? The New York Times? The Wall Street Journal? Today I was wrong on all counts... i it turned out to be The Washington Post.
Way to go... The media... Proxies for Bush-Paulson...
Unfortunately, in the end, none of this will work. The air is leaving the balloon and the economy is thrashing about and waiting for its death dive.
Man! Has anybody been to any of the stores recently? They are out of everything. When things are sold out, the managers have told me that nothing is in the pipeline to come it. It is really getting scary. I've heard the same from people in Illinois, New York and California... Is this the same thing happening everywhere? I'm talking a LOT of empty shelf space, or where there are things they've pushed the items to the front to hide the fact the shelf is almost empty.
A simple example:
JasonC deposits $100 in his checking account. The bank loans out $90. Jason's money is still available to him "on demand" hence the money supply has increased by $90. That $90 likely ends up in other banks where IT is lent out. The original $100 deposit turns into $1000 after filtering thru the banking system assuming a 10% reserve requirement.
JasonC may receive some interest on his checking account but others have been cheated by inflation. Thus fractional reserve banking is dishonest.
For more info:
mises.org/Books/myster...
sunlight surge fear in my family ¡
they let me down,always ¡
The government *will* be cut to the core, whether they like it or not, as a result. When that happens -- riots and blood in the streets. Because the entitlement recipients will not be happy campers.
I'm serious...it's coming. And a marxist in the White House, with radical leanings, isn't going to help things!!
What we have here is a meltdown of more than the financial system, it is the result of moral degradation of the American society. The author of this article seems to think that once this little blip is over there will be new highs in the Markets in short order. After the crash of 29 the markets didn't recover for 20 or 30 years depending on your definition of "recovered". I would be surprised if we see new highs in years-no matter how hard Americans work.
This time it's different ...
This time it's different ...
Too many people now believe the lies they and Madison Avenue helped to create.
When you hear the term "unwind" being used to describe the economy, what hey really should be saying is "unraveling."
I actually feel sorry for a lot of these people. They won't know what hit them.
Of course we will not learn. We are human beings. We are born into sin (if you want to take the spiritual side of looking at things) or we are born into stupidity and greed (if you want to take the cynical side of things.....I, for one, take both sides as equally true).
Look at the last 300 years of the banking system as we know it from the Bank of England to now. Look how many bubbles, panics, recessions, depressions, mania, etc. we have had. The generation that gets it in the neck is the one that learns. It's the stupid, greedy, sinful children and grandchildren of that generation who do not.....thus starting the whole sordid cycle over again.
The Wheel In The Sky keeps on turnin'....and eventually everything considered bad becomes good again....until reality bites in its harsh cosmic way.
Who spoke of a Derivative Plan,
After talking a week,
In much-twisted Fedspeak,
No one knew more than when he began.
to cut about 5,000 salaried jobs
biz.yahoo.com/ap/08102...
Vice Chairman and President Tom LaSorda said Friday that sales projections for the rest of this year and in 2009 aren't looking good, and he indicated that more factory closures could be coming.
He turns out the limericks with ease.
He makes it quite fun,
for those who have none
while we watch the Stock Market recede.
The solution for all the current market woes is on the internet! If only the gub'mint would follow these simple directions we'd be much better off.
www.wikihow.com/Do-Not...
-----------------
The market is down,
Government tries to help us,
Things only get worse.
The government needs to let everyone fail. Period. If you didn't earn it, by turning a wrench, then you didn't earn it.
I have 1 boss and (3) secretaries that get paid as well as I do in order to tell my customers what they owe. They never leave the office. They type emails all day. My company lives off of my hard work. Sometimes my shoulders hurt from handling all of the incoming work that they lay on me. My family suffers weekly because I am always working into 7, 8,9 pm when the secretaries roll the phones to the answering service at 5pm, which, guess what, is my cell number.
Soon, I will be tired of shouldering my company, and I will say enough. I will tell my customers to just call me directly and *I* will bill them directly, tax free.
This economy is going downhill, and it's not lending, it's the average man , whose house is being foreclosed on even though he goes to work everyday and pays his bills, whose tired of picking up the wrench for everyone riding his labor.
This country needs to produce, not send emails and pour over reports all day.
----------------------...
Al undertakes Fed.
Al inflates many bubbles.
Free market buried.
"The sleep of a laborer is sweet, whether he eats little or much, but the abundance of a rich man permits him no sleep." Ecclesiastes 5:12
You will prosper regardless of what transpires because you understand and are willing to do what it takes to succeed without 'hoping' to get it from others.
I know what you mean. Right after I partnered with a local greasy spoon owner I got laid off from my engineering job. I spent 3 months, unemployed, working at building out our new, bigger store location.
When the new store opened, I worked 10 hours/day, 7 days a week, washing dishes until the store got on its feet. After I finished with the dishes I also did the books and handled the store money for the day. I didn't start getting a paycheck until 9 months after the store opened. I've suffered my share of sore back muscles from leaning over that sink.
Six years later that store is running well and I just do the books and handle the money 7 days a week. I've gone back into engineering full time and work 14 or 15 hour days during the week between the two and several hours on Sat. and Sun. at the store.
That's what it takes to get ahead, but most aren't willing to pay that high a price. They think it will come from those "emailing" jobs from 9 to 5.
Keep slugging. You'll be better off for it soon enough.
Don't be surprised if people tell you what a rat-b@stard you are 15 years from now when you've become successful by taking intelligent risks and working hard turning that wrench. People envy the result if they don't understand the costs involved.
If I didn't *want* my bankers to lend my money out, I wouldn't have *given* my money to them. I'd leave it in my mattress or invest it myself. Nothing dishonest about a scrap of it.
If the volatility of the stock market scares you, don't invest in the stock market.
If the change in the value of currencies over time upsets you, don't hold currencies as a store of value.
Voluntary actions do not hurt you, they benefit you or you don't engage in them. If on the other hand you simply want them to benefit you *more*, at the expense of other men's freedoms, then you are making unjust demands, never having been wronged by anyone to justify them.
All the slanders of the Pauleans are warmed over money illusion from a convertible currency era. Nobody is making them any promises they aren't performing. But has-been ideologies never even bother to update their smears.
You are full of BS -- and i think you know it! Yes, there was some serious injustice done to Native Americans...even some genocidal activity. But read some real scholars, such as the widely-acclaimed Mr. Lee, who wrote "Bury My Heart at Wounded Knee". The facts are that such did happen, but you GREATLY exaggerate the time-frame, and along with that, give the implication that we all but wiped out Native Americans, and never did them a lick of good!
Lee cites real documentation, and is part Cherokee himself, if I remember. So he is quite trustworthy to not be minimizing what happened. Much of what happened was during the late 19th century, and notably, was NOT due to the usually blamed Christian missionaries, but due to the godless humanism of certain Army officers. When word reached Lincoln for example, and other officials later on, of some of these incidents...they investigated and sent other officers to take charge out in those territories. There were a few who did great damage among Army officers...while most took the honorable path of trying to accomodate both Native American rights *and* protecting settlers amidst the movement west.
Liberals love to bash America based on the excesses of a few radicals, who do not represent the norm. Little do they realize that they, ironically, are the ones doing the same at present -- destroying this country by tearing down its fabric with their hatred, lies, and godlessness. If you don't love this country, get the HELL OUT!!!
> jack
Read what Winston Churchill had to say about America's genocidal war.
If you're not working to make America better, perhaps you should leave.
Criticism is critical to improvement, de nial is more than a river in Egypt.
'What we learn from history is that we learn nothing from history".Toynbee maybe.
As I said in 2001, before this is done "stock" will be a dirty word. I think I am going to add "banking" to that list.
I have a plan to fix the whole thing (see all my comments on SA to read it) that will only be accepted when things get bad enough. They will get bad enough, but the Dow could be at 400 by then. People laughed when I told them in May that the market was about to crash, and laughed again when I told them in mid-July that oil would see "$20 before $200". You should take a look.
All these new bank deposits cause inflation? How?