"One answer to these questions is that nobody likes a party pooper. While the housing bubble was still inflating, lenders were making lots of money issuing mortgages to anyone who walked in the door; investment banks were making even more money repackaging those mortgages into shiny new securities; and money managers who booked big paper profits by buying those securities with borrowed funds looked like geniuses, and were paid accordingly. Who wanted to hear from dismal economists warning that the whole thing was, in effect, a giant Ponzi scheme?"
I don't see it as a Ponzi Scheme. One could read my thought experiment about looking into some of the more risky and complex inverstments as early as 2005, and being able to conclude that they were simply too risky. A number of things could have been done to keep this crisis from occurring or being this bad, whereas a Ponzi Scheme has Fraud built right into it. But I agree with the basic point, that it's hard to intentionally slow the economy down when so many people are still making money in it. It's one reason that I think it unlikely that the Fed, on its own, using a blunt instrument like raising interest rates across the board, will find it easy to raise rates to slow the economy down. Nevertheless, I believe that middle of the party is the part of the party where real diligence needs to be taken. In other words, focus on emerging problems in the economy when things start really going well, especially for a long period of time. Although it's hard to do, it's necessary.
"There’s also another reason the economic policy establishment failed to see the current crisis coming. The crises of the 1990s and the early years of this decade should have been seen as dire omens, as intimations of still worse troubles to come. But everyone was too busy celebrating our success in getting through those crises to notice.
Consider, in particular, what happened after the crisis of 1997-98. This crisis showed that the modern financial system, with its deregulated markets, highly leveraged players and global capital flows, was becoming dangerously fragile. But when the crisis abated, the order of the day was triumphalism, not soul-searching.
Time magazine famously named Mr. Greenspan, Robert Rubin and Lawrence Summers “The Committee to Save the World” — the “Three Marketeers” who “prevented a global meltdown.” In effect, everyone declared a victory party over our pullback from the brink, while forgetting to ask how we got so close to the brink in the first place.
In fact, both the crisis of 1997-98 and the bursting of the dot-com bubble probably had the perverse effect of making both investors and public officials more, not less, complacent. Because neither crisis quite lived up to our worst fears, because neither brought about another Great Depression, investors came to believe that Mr. Greenspan had the magical power to solve all problems — and so, one suspects, did Mr. Greenspan himself, who opposed all proposals for prudential regulation of the financial system."There is some truth in this, but it misunderstands the nature of the triumphalism. The system worked because of government and Fed actions that were taken during these years. This led to a complacency in the nature and strength of the implicit and explicit government guarantess of intervention in a financial crisis. It was less relief at our wisdom, than a realization of the nature and depth of government backing of our financial system. The downside of excessive risk was thereby consigned to government accounts and salvation, a view that has proven remarkably prescient.
"And because we’re all so worried about the current crisis, it’s hard to focus on the longer-term issues — on reining in our out-of-control financial system, so as to prevent or at least limit the next crisis. Yet the experience of the last decade suggests that we should be worrying about financial reform, above all regulating the “shadow banking system” at the heart of the current mess, sooner rather than later.
For once the economy is on the road to recovery, the wheeler-dealers will be making easy money again — and will lobby hard against anyone who tries to limit their bottom lines. Moreover, the success of recovery efforts will come to seem preordained, even though it wasn’t, and the urgency of action will be lost.
So here’s my plea: even though the incoming administration’s agenda is already very full, it should not put off financial reform. The time to start preventing the next crisis is now. "I disagree here as well. The real fear is that we will regulate excessively in the midst of this crisis, focusing in on the problems of this last crisis, and not putting into place a system that focuses less on actual regulation than recognition of the problems in our finacial system, some of which won't need more than supervision, while some might need regulatory oversight.
And to reiterate, just like value investing, we should be especially vigilent and fearful when things are going well, not after they've turned bad. I know it's going to be hard, but it's simply the patience, vision, and wisdom, of the value investor, a strategy that human beings have been able to execute.
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