I thought I’d worn myself out on the financial crisis. I’ve noticed people around me yawning if I bring it up, so I’ve tried to control myself. But this Atlantic article got me going again. It’s written by a former Trader who describes being bitten by the "bubbles" along the way, and about all the forces that keep managers and investors from seeing them for what they are, always saying, "It will be different this time." He thinks that "bubbles" are just part of the game, and they’ll always be there.
… As we work our way through the wreckage of this latest colossal bust, our government—at our urging — will go to great lengths to try to make sure such a bust never happens again. We will “fix” the “problems” that we decide caused the debacle; we will create new regulatory requirements and systems; we will throw a lot of people in jail. We will do whatever we must to assure ourselves that it will be different next time. And as long as the searing memory of this disaster is fresh in the public mind, it will be different. But as the bust recedes into the past, our priorities will slowly change, and we will begin to set ourselves up for the next great boom.
A few decades hence, when the Great Crash of 2008 is a distant memory and the economy is humming along again, our government — at our urging — will begin to weaken many of the regulatory requirements and systems we put in place now. Why? To make our economy more competitive and to unleash the power of our free-market system. We will tell ourselves it’s different, and in many ways, it will be. But the cycle will start all over again.
So what can we learn from all this? …
First, bubbles are to free-market capitalism as hurricanes are to weather: regular, natural, and unavoidable. They have happened since the dawn of economic history, and they’ll keep happening for as long as humans walk the Earth, no matter how we try to stop them. We can’t legislate away the business cycle, just as we can’t eliminate the self-interest that makes the whole capitalist system work. We would do ourselves a favor if we stopped pretending we can.
Second, bubbles and their aftermaths aren’t all bad: the tech and Internet bubble, for example, helped fund the development of a global medium that will eventually be as central to society as electricity. Likewise, the latest bust will almost certainly lead to a smaller, poorer financial industry, meaning that many talented workers will go instead into other careers — that’s probably a healthy rebalancing for the economy as a whole. The current bust will also lead to at least some regulatory improvements that endure; the carnage of 1933, for example, gave rise to many of our securities laws and to the SEC, without which this bust would have been worse.
Lastly, we who have had the misfortune of learning firsthand from this experience — and in a bust this big, that group includes just about everyone — can take pains to make sure that we, personally, never make similar mistakes again. Specifically, we can save more, spend less, diversify our investments, and avoid buying things we can’t afford. Most of all, a few decades down the road, we can raise an eyebrow when our children explain that we really should get in on the new new new thing because, yes, it’s different this time
I protest! In the discussions by Traders and Managers, there’s a tendency to talk like this – to call what has happened part of the "business cycle." I don’t disagree with what he says about "bubbles" in general or the "housing bubble" in the specific. They are part of the ebb and flow of the Market,- a correction of our "irrational exuberance." But, unless I’m missing the point, that’s not
the big problem this time. It’s
a big problem. But he’s leaving out the now infamous
unregulated credit default swaps that Senator Phil Gramm helped fall in the cracks between the
SEC [Stock Markets] and the
CFTC [Commodities Markets] with the
Commodity Futures Modernization Act of 2000. And he’s leaving out Phil Gramm’s
Gramm-Leach-Bliley Act of 1999 that helped Commercial Banks and Investment Banks to merge and do this:
Why did Bear Stearns, Lehman Brothers, Fannie Mae, Freddie Mac, AIG, and the rest of an ever-growing Wall Street hall of shame take so much risk that they ended up blowing their firms to kingdom come? Because in a bull market, when you borrow and bet $30 for every $1 you have in capital, as many firms did, you can do mind-bogglingly well. And when your competitors are betting the same $30 for every $1, and your shareholders are demanding that you do better, and your bonus is tied to how much money your firm makes—not over the long term, but this year, before December 31—the downside to refusing to ride the bull market comes into sharp relief. And when naysayers have been so wrong for so long, and your risk-management people assure you that you’re in good shape unless we have another Great Depression (which we won’t, of course, because it’s different this time), well, you can easily convince yourself that disaster is a possibility so remote that it’s not even worth thinking about.
His discussion of the Internet "dot.com bubble" in the text of the article is probably spot on. But the "Housing bubble" is a different story, and infinitely worse. It was turned from a big problem into a disaster by allowing Banks to become betting parlors with the unregulated credit default swaps as the poker chips on a giant roulette wheel. Gramm’s Bills should never have been passed [without even being debated] or signed by the President [Clinton in his last days]. The "Housing bubble" was shepherded by these bills, and the losses were multiplied geometrically by these bills. Neither the Congress nor the President had any idea what they were unleashing.
In the coming months as Congress begins to try to plug the holes, this distinction between naturally occurring "bubbles" and turning Wall Street into a Casino must be recurrently clarified. Business didn’t do this with its "business cycles." Congress did this without knowing it at the behest of a crook named [former Senator] Phil Gramm working for the dark side of Wall Street. That shouldn’t happen again. We can live with the ups and downs of Wall Street, but we can not survive white collar crime at this level. Crime doesn’t need to be part of the "business cycle"…
I agree totally !! The tendency to excuse all this as “happens all the time” is sort of like saying “boys will be boys” when a gang has raped the neighbor girl.
Maybe we should accept that greed is such a ubiquitous trait in human beings (although I don’t think we all have it developed to the extent seen in financiers) — and that we have to regulate it, lest they find yet another way to go around the system to slake their greedy thirst for more and more . . .
The only other way is the Ayn Rand way — a brutal. dog-eat-dog free market that has no regulations AND is open to failure at every level. But the result of that has been proven to be a bigger and bigger gap between super-wealth and wide-spread poverty, as well as fewer and fewer gigantic financial institutions that we cannot afford to let fail. So then we step in to bail them out — like now.
I choose not to live in a nation that has that model as its ideal.