"You can survive every illness, every disease, except for which?"
Hands immediately shot up.
"AIDS?" one reticent student asked, quite sure of her answer yet sensing a trap, a trick question.
"Well, perhaps," replied the professor. "But that's not what I had in mind."
Some hands that were raised went down, the students obviously disappointed and bewildered, while others, seeking opportunity, quickly raised their's.
"Terminal Cancer," offered a boy, confident in his answer, especially since he had taken care to emphasize terminal.
"No," said the professor. "Not that, either."
Silence. What else could there be?
"Meningitis," came the voice from the back of the room. "Bacterial meningitis!"
"No, no. Not that one," said the whithered professor, feigning disappointment, but taking obvious delight in this riddle, perhaps one of the few parlor-trick questions that he still hadn't grown tired of asking after decades of giving basically the same seminar, because not even his brightest students ever got the answer right.
So, after a few more half-hearted replies, running the gamut of fatal illnesses that the class collectively knew about, the old and learned professor gave the answer.
"You can survive every disease," (he paused for dramatic effect) "except the LAST."
The professor leaned over the lectern when he said this, gripping its edges, and eyeballing the whole class with a foreboding glare, proud of the fact that for one more semester he had stumped a room full of bright, confident, over-caffeinated, and under-rested adolescents. Age still able to have a go at youth.
That being at the end of class, the students shuffled out silently, disappointed and defeated, feeling sucker-punched; each waiting with baited-breath, anticipating that they might actually learn about some newly discovered menace that even their freshman orientation STD seminar had not prepared them for, yet walking out empty-handed.
***
Recession, the "Natural Choice"
The way the economy has been for much of the past year, many Americans feel empty-handed as well. With the current economic crisis, spurred on by massive losses tied to subprime loans, (POSSIBLY!) coming to an end, we are left to wonder exactly which economic crisis will be the one that we do not survive. The answer, depending on who you ask, is: This one, the last one, the next one. While an economic downturn is the ugly bi-product of a period of grand prosperity, during which many a fortune was made, we are always hit with the grim and sobering fact that many a fortune can easily be lost (gratuitous trading joke: How do you get $1,000,000 from trading? Start with $2,000,000). Yet each time we are hit with an economic bust, anyone from politicians, to CEOs, to mathematicians, to investors, to economists, and so on and so forth, vow to learn from the mistakes that led to the mess and find ways to prevent such a horrible situation from ever happening again. Yet, just as the good times roll during the inevitable economic booms, we are left licking our wounds or, worse, going broke, when the boom times go bust.
So, if we, as a society, pledge that we will strive to be more careful, more economically responsbile, and invent ways to make our economy more fail-proof and more reliable than ever, why do the bad times keep on coming?
Up Next? Uh, I don't know... It's complicated
If my college psych professor's answer to his self-indulgent riddle is that "you can survive every disease except for the last one" then perhaps the solution to the mystery of the recurring economic turmoil is "you can prepare for every economic bust except for the next one."
Think about it: Has there ever been an extended period without some sort of economic downturn? From the fallout from the 17th century "Tulip Mania" to the "Subprime Mortgage Mess" of today, history is fraught with economic bubbles just waiting to be burst. And, while we have consistently picked ourselves up and dusted ourselves off once the tragic events had passed and we resolve to reclaim our economy, armed with the wisdom from the lessons of our failures, all we really know how to do is prevent what had just happened.
But, alas, while there has never exactly been another Tulip Mania, or Great Depression, or Hunt Brothers run on silver, or Crash of '87, or Dot Com bubble, or Housing bubble since each had occurred, the lessons gleaned from each catastrophe did not do any good in preventing the next.
We may have developed precise financial instruments and lending policies that can prevent an exact repeat of the events that led to the Great Depression of the 1920's and 30's. However, nothing that happened then could have prepared us for the inaccuracies in price quotes when new technology, overwhelmed by massive volume, delivered stock prices that were so out of sync with live trading, that it caused a panicked frenzy of selling, leading to the Crash of '87. In our very nature we, as humans, with all of our supreme intellect can only prepare for and prevent that which we know of and cannot even anticipate the pitfalls of the unfamiliar; and that is why economic busts keep occurring.
A fantastic book that clearly illustrates this point is A Demon of Our Own Design (Link 1) by Richard Bookstaber. In his book, Mr. Bookstaber, a long-time Wall Street risk manager and executive at the now-defunct hedge fund Long-Term Capital Management in the mid 1990's, discusses the numerous, random, and seemingly insignificant intricacies that lead to economic collapse. One of Bookstaber's arguments is that the very methods put in place to both regulate the economy and make it less risky carry their own set of consequences that may end up being the very catalysts for unforseen economic disaster. He makes several real-life analogies to this end, discussing a recent airline tragedy in which an over-looked safety check, one in a long list of tedious safety checks, led to the horrific ValueJet explosion. Mr. Bookstaber's assertion is that some of these safety checks may have been unecessary in that they served to over-complicate the process of making sure that the plane was fit to fly, the point being that simplicity may be better than thorough over-regulation. We can draw a similar comparisson to automobile airbags. Although airbags are intended to save lives by cushioning the impact a person endures during a car accident, there have been numerous accounts of unintended deployment (perhaps a result of faulty, intricate, computerized wiring), failure to deploy when needed, and the horrible deaths of infants, either smothered by an airbag or made to suffer fatal injuries brought on by the force of the airbag. There is no doubt that the airbag is a well-intended safety feature now found in all new automobiles. But, they carry many risks of their own, risks that would not exist if they did not exist.
So, if we, as a society, pledge that we will strive to be more careful, more economically responsbile, and invent ways to make our economy more fail-proof and more reliable than ever, why do the bad times keep on coming?
Up Next? Uh, I don't know... It's complicated
If my college psych professor's answer to his self-indulgent riddle is that "you can survive every disease except for the last one" then perhaps the solution to the mystery of the recurring economic turmoil is "you can prepare for every economic bust except for the next one."
Think about it: Has there ever been an extended period without some sort of economic downturn? From the fallout from the 17th century "Tulip Mania" to the "Subprime Mortgage Mess" of today, history is fraught with economic bubbles just waiting to be burst. And, while we have consistently picked ourselves up and dusted ourselves off once the tragic events had passed and we resolve to reclaim our economy, armed with the wisdom from the lessons of our failures, all we really know how to do is prevent what had just happened.
But, alas, while there has never exactly been another Tulip Mania, or Great Depression, or Hunt Brothers run on silver, or Crash of '87, or Dot Com bubble, or Housing bubble since each had occurred, the lessons gleaned from each catastrophe did not do any good in preventing the next.
We may have developed precise financial instruments and lending policies that can prevent an exact repeat of the events that led to the Great Depression of the 1920's and 30's. However, nothing that happened then could have prepared us for the inaccuracies in price quotes when new technology, overwhelmed by massive volume, delivered stock prices that were so out of sync with live trading, that it caused a panicked frenzy of selling, leading to the Crash of '87. In our very nature we, as humans, with all of our supreme intellect can only prepare for and prevent that which we know of and cannot even anticipate the pitfalls of the unfamiliar; and that is why economic busts keep occurring.
A fantastic book that clearly illustrates this point is A Demon of Our Own Design (Link 1) by Richard Bookstaber. In his book, Mr. Bookstaber, a long-time Wall Street risk manager and executive at the now-defunct hedge fund Long-Term Capital Management in the mid 1990's, discusses the numerous, random, and seemingly insignificant intricacies that lead to economic collapse. One of Bookstaber's arguments is that the very methods put in place to both regulate the economy and make it less risky carry their own set of consequences that may end up being the very catalysts for unforseen economic disaster. He makes several real-life analogies to this end, discussing a recent airline tragedy in which an over-looked safety check, one in a long list of tedious safety checks, led to the horrific ValueJet explosion. Mr. Bookstaber's assertion is that some of these safety checks may have been unecessary in that they served to over-complicate the process of making sure that the plane was fit to fly, the point being that simplicity may be better than thorough over-regulation. We can draw a similar comparisson to automobile airbags. Although airbags are intended to save lives by cushioning the impact a person endures during a car accident, there have been numerous accounts of unintended deployment (perhaps a result of faulty, intricate, computerized wiring), failure to deploy when needed, and the horrible deaths of infants, either smothered by an airbag or made to suffer fatal injuries brought on by the force of the airbag. There is no doubt that the airbag is a well-intended safety feature now found in all new automobiles. But, they carry many risks of their own, risks that would not exist if they did not exist.
Yet, after each economic crisis, we scramble to overhaul certain aspects of our financial system, developing new wrinkles and adding new guidelines, in order to safeguard against future calamity.
Recession, the "Natural Choice"
An economic slowdown is met with such urgency because it is proof that productivity is down and jobs may be lost, among other things, signalling a possible recession. Just to be clear, not every economic crisis leads to recession. Usually, like in the case of the Crash of '87, the disaster is an isolated instance; shame on those who supposedly caused it, own up to your mistakes, atone for your sins, and move on from there, all of us the better for it. But each time an event occurs that reveals our economy's vulnerabilities, we sound the alarm, knowing that these are the types of situations that could lead to an extended, drastic economic downturn. Therefore, we try and plug the wound, not wanting it to fester and contaminate the larger economy. In A Demon of Our Own Design, Mr. Bookstaber also discusses how small, singular events can be the trigger-point for a major meltdown. He cites chaos theory and "the Butterfly Effect" to show how any particular circumstance can set up a chain reaction with far-reaching results.
While we should take some responsibility for the economy and acknowledge the fact that our actions in the markets can carry a wide-range of unforseen consequences, of indeterminable impact, should a recession really be something that we, as a society, fear?
Well, in a word, yes, we should fear a recession. After all, a recession is living proof that we have exhausted certain financial resources and that people might not necessarily posess the personal resources to uphold the economy.
But, is a recession necessarily the destructive parasite that we make it out to be? Or is it simply a very natural and necessary part of our economic cycle?
I read a New York Times article a few years ago (Link 2) that discussed forest fires, their impact on the environment, their function in nature, and how attempts to prevent them carry very dire consequences. Although forest fires pose obvious threats to humans who visit our woodlands and live in or near them; not to mention the fact that they ravage countless species of animals, their habitats, and other vital natural resources, forest fires actually have a very vital function in our larger ecosystem.
After years and years a forest's usefulness tends to naturally erode. Trees that were once home to numerous animals eventually get stripped of their resources, making them unable to sustain their own lives, let alone those that they had nurtured. At the same time, soil becomes less nutritious, losing the minerals and nutrients that helped to make the forest such a lush and healthy environment. As things in the forest dry up and die, they become more prone to a naturally occurring fire. The sun, hitting a patch of dried, decaying leaves and tinder at just the right angle and with just the right intensity can be enough to ignite an inferno that can consume acres, if not miles of forest land. Although the destruction left in the wake of an intensely burning fire is considered a tragedy, the fire was, in fact, a very important part of the forest's life cycle.
Each forest has what is called a burn cycle, a period of around 100 years, give or take based on the size and density of the forest, at which point the forest will naturally combust. The burn cycle invariably takes place when the forest begins to die on its own and its resources become dry and more prone to burning, as explained earlier. What happens after the forest has caught fire and burned, is that it becomes prepared for new life. With its soil returned to vitality by the debris of burnt matter, the forest can now sustain brand new trees, animals, insects, and other species that will, in time, make their home there; like a new canvas ready for a masterpiece to be painted on it. Had the fire never occurred, the forest would not have been able to purge itself of dead and useless resources, and would not be fit for cultivating new life.
Both environmental conservationists and others who utilize our woodlands for living, business, vacationing, and other forms of recreation are keenly in tune to the dangers of forest fires, with the conservationists also emphasizing the dangers of deforestation. While the National Parks Service also recognizes these dangers, it is more concerned about the effects that irresponsible humans have on the forest. A lit cigarette butt carelessly tossed into a pile of leaves or an unattended camp fire left to burn-out over night are a couple of the ways in which people can cause forest fires, practices that environmentally conscious citizens and our government agencies work hard to discourage. The same can be said for reckless and irresponsible removal or vandalism of trees.
However, most of those involved with the forests know that a fire and/or the removal of trees can be very beneficial. Citing the immense benefits that the forest and all of its natural resources have on life in general, conservationists favor the complete preservation of our forests. However, if a forest is completely protected and never purged of any trees, it will most certainly become overgrown. Then, when a fire does occur, either by nature or by the careless acts of people, it will burn all the more ferociously, wreaking even more destruction than it otherwise might have. Furthermore, if forest fires are to be prevented in any way possible, the same is bound to happen: the fire will just burn hotter and longer when it inevitably does take place. To this end, the National Parks Service will often take matters into its own hands by systematically starting small, contained fires in our forests and by strategically removing trees so that a fire of catastrophic proportions is less likely to take place.
So, where does this fit in with the economy? Well, if the metaphor was not clear (you didn't think I turned all Smokey the Bear on you and just started ranting about the forest, did you?), then look at it this way: If a sudden economic crisis is a blazing forest fire, then a recession is simply what can be perceived as a vast wasteland that the forest has become after the fire has settled and the smoke has cleared. However, as we now know is the case after a forest fire, an economy that may look like a depressed, dead nothingness is actually a brand new landscape; fresh, upturned, and waiting to breed new wealth and opportunity!
Ask any economist, and he or she will tell you that a recession is a vital component to our economy. Just as a forest sometimes needs to purge itself of waste and over-abundance, the economy must do the same. Much in the same way as forests have a burn cycle, the economy has a recession cycle, occurring every seven years or so. While it is only natural that a recession will in fact happen from time to time, its extent and impact is very much based on the extent of the prosperity that preceded it and the ways in which we went about preventing and preparing for it. Therefore, consider yourself forewarned that aggressie attempts to forestall a recession will only increase its intensity when it finally occurs.
A Loser for Every Winner
We seek to avoid recessions at all cost because when a recession hits we must face the fact that a large portion of our population will either lose wealth or have a difficult time gaining wealth, lives may be ruined, and we will lose market share in the global economy. As much as a market economy is predicated on there being a lower class, and acknowledges that there will be losers to go along with the winners, we still operate under this idealized notion that EVERYBODY can succeed. But consider that for a second; this idea that everybody can succeed. How awful would that be? Let alone impossible. If everybody was successful, if we all had our millions of dollars and all that we wanted at our disposal, then how would we even be able to recognize success for what it really is?
The fact that anybody makes any money in the markets is based on the fact that there is an equal number of wins and losses. It is the great equalizer that at the very end of the day, the balance at the Stock Exchange is exactly zero; a true zero sum endeavor. If a dollar is made, then a dollar is lost. We hear so much about hedge fund managers who personally make billions of dollars in capital gains and we become seduced by the idea that that can happen for us. Yet, we fail to consider the simple fact that in order for that fund manager to accumulate his billions, somewhere along the line billions of dollars were lost, not necessarily by one person (God, I hope not!), but throughout the entire market.
So, if we know that market loses are at the very foundation of a healthy and successful economy, we should not be so fearful at the prospect of an economic slowdown that affects all of us.
Because humans live more by intellect than by instinct, we tend to distance ourselves from nature or at least the natural order of things, as if we have somehow transcended nature. However, nature always finds a way to correct everything. In fact, Capitalism is, at least in my mind, the purest type of economy because it carries a system of checks and balances, and has successes and failures, just as we find in the natural world. The forest needs to regulate itself with fires in order to stay vital in the long run. Our economy does likewise through recession.
We cannot prevent a recession any more than we can prevent a forest fire. No matter what we do, each will happen sooner or later. And, as we have seen time and time again in our economy, the experiences from one economic crisis cannot necessarily prepare us for the unknown that is sure to come. So, while prevention may not be 100% viable, preparation is. Through selective deforestation and by starting small but contained fires, the National Parks Service does its part to anticipate a possible forest fire, thereby curtailing its effects on the surrounding area. Our government and central banking system does its part as well, for the economy. By raising and lowering interest rates, the central bank (aka The Fed) takes measures to control the economy and make sure that neither financial feast nor famine overwhelms us. Our government passes tax laws, provides funding, and grants subsidies to businesses, groups, organizations, and individuals in order to promote economic viability. In the end, though, it seems as if something always happens to derail our best efforts.
When "Win, Win" Becomes "Lose, Lose"
Aside from the simple fact that it is just natural that something will eventually work against anything in this world, economic prosperity included, we can, like our public servants, take some action in limiting the effects of that which work against us. First of all, we must acknowledge the vulnerabilities in our sophisticated financial instruments and realize that they leave us open for disaster in one way or another. Secondly, we can practice individual financial prudence and protect that which we have accumulated in the event that something goes wrong. Finally, we can allow our government and central bank to step in when they sense danger, such as a financial bubble about to burst, and take action.
I read a New York Times article a few years ago (Link 2) that discussed forest fires, their impact on the environment, their function in nature, and how attempts to prevent them carry very dire consequences. Although forest fires pose obvious threats to humans who visit our woodlands and live in or near them; not to mention the fact that they ravage countless species of animals, their habitats, and other vital natural resources, forest fires actually have a very vital function in our larger ecosystem.
After years and years a forest's usefulness tends to naturally erode. Trees that were once home to numerous animals eventually get stripped of their resources, making them unable to sustain their own lives, let alone those that they had nurtured. At the same time, soil becomes less nutritious, losing the minerals and nutrients that helped to make the forest such a lush and healthy environment. As things in the forest dry up and die, they become more prone to a naturally occurring fire. The sun, hitting a patch of dried, decaying leaves and tinder at just the right angle and with just the right intensity can be enough to ignite an inferno that can consume acres, if not miles of forest land. Although the destruction left in the wake of an intensely burning fire is considered a tragedy, the fire was, in fact, a very important part of the forest's life cycle.
Each forest has what is called a burn cycle, a period of around 100 years, give or take based on the size and density of the forest, at which point the forest will naturally combust. The burn cycle invariably takes place when the forest begins to die on its own and its resources become dry and more prone to burning, as explained earlier. What happens after the forest has caught fire and burned, is that it becomes prepared for new life. With its soil returned to vitality by the debris of burnt matter, the forest can now sustain brand new trees, animals, insects, and other species that will, in time, make their home there; like a new canvas ready for a masterpiece to be painted on it. Had the fire never occurred, the forest would not have been able to purge itself of dead and useless resources, and would not be fit for cultivating new life.
Both environmental conservationists and others who utilize our woodlands for living, business, vacationing, and other forms of recreation are keenly in tune to the dangers of forest fires, with the conservationists also emphasizing the dangers of deforestation. While the National Parks Service also recognizes these dangers, it is more concerned about the effects that irresponsible humans have on the forest. A lit cigarette butt carelessly tossed into a pile of leaves or an unattended camp fire left to burn-out over night are a couple of the ways in which people can cause forest fires, practices that environmentally conscious citizens and our government agencies work hard to discourage. The same can be said for reckless and irresponsible removal or vandalism of trees.
However, most of those involved with the forests know that a fire and/or the removal of trees can be very beneficial. Citing the immense benefits that the forest and all of its natural resources have on life in general, conservationists favor the complete preservation of our forests. However, if a forest is completely protected and never purged of any trees, it will most certainly become overgrown. Then, when a fire does occur, either by nature or by the careless acts of people, it will burn all the more ferociously, wreaking even more destruction than it otherwise might have. Furthermore, if forest fires are to be prevented in any way possible, the same is bound to happen: the fire will just burn hotter and longer when it inevitably does take place. To this end, the National Parks Service will often take matters into its own hands by systematically starting small, contained fires in our forests and by strategically removing trees so that a fire of catastrophic proportions is less likely to take place.
So, where does this fit in with the economy? Well, if the metaphor was not clear (you didn't think I turned all Smokey the Bear on you and just started ranting about the forest, did you?), then look at it this way: If a sudden economic crisis is a blazing forest fire, then a recession is simply what can be perceived as a vast wasteland that the forest has become after the fire has settled and the smoke has cleared. However, as we now know is the case after a forest fire, an economy that may look like a depressed, dead nothingness is actually a brand new landscape; fresh, upturned, and waiting to breed new wealth and opportunity!
Ask any economist, and he or she will tell you that a recession is a vital component to our economy. Just as a forest sometimes needs to purge itself of waste and over-abundance, the economy must do the same. Much in the same way as forests have a burn cycle, the economy has a recession cycle, occurring every seven years or so. While it is only natural that a recession will in fact happen from time to time, its extent and impact is very much based on the extent of the prosperity that preceded it and the ways in which we went about preventing and preparing for it. Therefore, consider yourself forewarned that aggressie attempts to forestall a recession will only increase its intensity when it finally occurs.
A Loser for Every Winner
We seek to avoid recessions at all cost because when a recession hits we must face the fact that a large portion of our population will either lose wealth or have a difficult time gaining wealth, lives may be ruined, and we will lose market share in the global economy. As much as a market economy is predicated on there being a lower class, and acknowledges that there will be losers to go along with the winners, we still operate under this idealized notion that EVERYBODY can succeed. But consider that for a second; this idea that everybody can succeed. How awful would that be? Let alone impossible. If everybody was successful, if we all had our millions of dollars and all that we wanted at our disposal, then how would we even be able to recognize success for what it really is?
The fact that anybody makes any money in the markets is based on the fact that there is an equal number of wins and losses. It is the great equalizer that at the very end of the day, the balance at the Stock Exchange is exactly zero; a true zero sum endeavor. If a dollar is made, then a dollar is lost. We hear so much about hedge fund managers who personally make billions of dollars in capital gains and we become seduced by the idea that that can happen for us. Yet, we fail to consider the simple fact that in order for that fund manager to accumulate his billions, somewhere along the line billions of dollars were lost, not necessarily by one person (God, I hope not!), but throughout the entire market.
So, if we know that market loses are at the very foundation of a healthy and successful economy, we should not be so fearful at the prospect of an economic slowdown that affects all of us.
Because humans live more by intellect than by instinct, we tend to distance ourselves from nature or at least the natural order of things, as if we have somehow transcended nature. However, nature always finds a way to correct everything. In fact, Capitalism is, at least in my mind, the purest type of economy because it carries a system of checks and balances, and has successes and failures, just as we find in the natural world. The forest needs to regulate itself with fires in order to stay vital in the long run. Our economy does likewise through recession.
We cannot prevent a recession any more than we can prevent a forest fire. No matter what we do, each will happen sooner or later. And, as we have seen time and time again in our economy, the experiences from one economic crisis cannot necessarily prepare us for the unknown that is sure to come. So, while prevention may not be 100% viable, preparation is. Through selective deforestation and by starting small but contained fires, the National Parks Service does its part to anticipate a possible forest fire, thereby curtailing its effects on the surrounding area. Our government and central banking system does its part as well, for the economy. By raising and lowering interest rates, the central bank (aka The Fed) takes measures to control the economy and make sure that neither financial feast nor famine overwhelms us. Our government passes tax laws, provides funding, and grants subsidies to businesses, groups, organizations, and individuals in order to promote economic viability. In the end, though, it seems as if something always happens to derail our best efforts.
When "Win, Win" Becomes "Lose, Lose"
Aside from the simple fact that it is just natural that something will eventually work against anything in this world, economic prosperity included, we can, like our public servants, take some action in limiting the effects of that which work against us. First of all, we must acknowledge the vulnerabilities in our sophisticated financial instruments and realize that they leave us open for disaster in one way or another. Secondly, we can practice individual financial prudence and protect that which we have accumulated in the event that something goes wrong. Finally, we can allow our government and central bank to step in when they sense danger, such as a financial bubble about to burst, and take action.
Since it has had such a disastrous impact on our economy, the subprime lending crisis has been regarded by many as a gross malfeasance, in which an unsuspecting public was duped into some horrible bait-and-switch, where loans that appeared to be a lifeline to the American Dream somehow mutated into a financial leach that sapped people of whatever financial capital they had. Now, this may be partially true, only in that the banks who wrote the loans did not take the time to properly assess the risk that they would take on in those who were receiving the loans. Although the banks knew that some borrowers might have trouble repaying their loans, especially when the rates on the widely offered Adjustable Rate Mortgages (ARMs) went up, they lent money quite freely. The throught process behind the loose lending practices was that since the real estate market was so hot, borrowers, who at that time were pretty much guaranteed that the value of their home would skyrocket, could always use their fast building equity to pay off their debts should they run into a finaincial pinch. Originally, the basic premise behind a subprime loan was purely "win, win". With the housing market booming, residential construction at its highest rate in years, and cities all over the country expanding and developing, it only made sense that honest, hard working people who were throwing money away on rent should have the chance to own a home. This is where the good intentions lay; banks providing people the opportunity to build equity in a home, that most definitive of American assets, thereby adding strength to an already booming economy. For their troubles, the banks could charge a slightly higher interest rate (or one that was creatively structured to appear cheap), meaning that all involved were winners. The banks had more money and more people had homes.
What the banks failed to consider, it seems, is that the people to whom they were lending, many of whom had poor credit histories, would probably not be able to continue paying their mortgages after a while no matter what, especially when their rates went up. What made the subprime mortgage market such a mess was that it was perhaps one of the hugest rolls-of-the-dice in our history. Then, in what ended up muddying the picture and over-complicating the whole situation, was that the banks hedged themselves against the loans going bad by selling off parts of the mortgages to other banks; in such a way called Credit Default Swaps, a complicated practice whereby banks would package mortgage debt in bulk, slice it, dice it, sell it off to other banks, and collect interest payments in exchange for guaranteeing the debt. This meant that the mortgage money was not even necessarily coming from the bank at which the mortgage was signed, but may have come from some overseas bank, adding an element of confusion and over-regulation that Mr. Bookstaber warned against. Banks were literally betting that momentum from a robust economy would propel the average citizen into a new stratosphere of economic independence... and the world went right along with it! (So shame on everybody else, too!)
One maxim that traders often hear, one that my father has instilled in me time and time again, is that you should make a trade only if you think the market will work in your favor, never if you hope it will. Even if you think the market will go your way, you have to be prepared in case it does not go your way and manage your positions accordingly. Well, whether the banks were thinking the economy could support these loans or just hoping that it would is up for debate. In any event, the economy did not go as the banks had bet that it would, and it seems that they did not manage their positions in an appropriate way.
What the banks failed to consider, it seems, is that the people to whom they were lending, many of whom had poor credit histories, would probably not be able to continue paying their mortgages after a while no matter what, especially when their rates went up. What made the subprime mortgage market such a mess was that it was perhaps one of the hugest rolls-of-the-dice in our history. Then, in what ended up muddying the picture and over-complicating the whole situation, was that the banks hedged themselves against the loans going bad by selling off parts of the mortgages to other banks; in such a way called Credit Default Swaps, a complicated practice whereby banks would package mortgage debt in bulk, slice it, dice it, sell it off to other banks, and collect interest payments in exchange for guaranteeing the debt. This meant that the mortgage money was not even necessarily coming from the bank at which the mortgage was signed, but may have come from some overseas bank, adding an element of confusion and over-regulation that Mr. Bookstaber warned against. Banks were literally betting that momentum from a robust economy would propel the average citizen into a new stratosphere of economic independence... and the world went right along with it! (So shame on everybody else, too!)
One maxim that traders often hear, one that my father has instilled in me time and time again, is that you should make a trade only if you think the market will work in your favor, never if you hope it will. Even if you think the market will go your way, you have to be prepared in case it does not go your way and manage your positions accordingly. Well, whether the banks were thinking the economy could support these loans or just hoping that it would is up for debate. In any event, the economy did not go as the banks had bet that it would, and it seems that they did not manage their positions in an appropriate way.
We are now on some sort of witch hunt for bad loans, resolved to exorcise these demons and banish them from our midst, so that they can never again taint our pure economy and harm our innocent public. There is nothing wrong with jumping on the bandwagon and trying to cash in on a booming economy, as both the banks who wrote the loans and the people who received the loans did. After all, as much as nature is predicated on losers and winners, it is also predicated on competition and incentive; that we try to either use the resources available to us or invent new ways to get ahead (even at the expense of others, hence the losers), in hopes that we will be better off for it. But maybe there needs to be a red flag system in place where we can say "Times may be good and there is more wealth to go around than ever before. But, maybe it wouldn't be such a good idea to offer loans to people who have not provided clear evidence that they can actually pay." There needs to be some attempt to draw the line because we know that somewhere, somehow, we will suffer a downturn. Remember, subprime loans were well-intended because ideally they offered everybody a chance to own a home. But, as we know, the notion of everybody succeeding is unnatural and therefore destined for failure.
Ahoy Trader! I See Gold in That Market. Arggh!
These are GREAT times to be a trader! With the market so shaky, so sensitive to information and world events, there is great volatility and wide swings in the market that provide ample opportunities for quick profits. I consider us, as traders, to be pirates, raiding, pillaging, and looting a battered economy. Cheap stocks, mergers, commodity prices way above previous records, and the like have provided us the opportunity to simply come ashore and take what we please. But, as there is plenty of booty to be gotten, do we want to leave it all on the deck of the ship, where it can be snatched away from us by some other shrewd swashbuckler? Or do we want to bury some of the haul in a treasure chest at the bottom of the sea, where it won't be touched until we come and get it?
Ahoy Trader! I See Gold in That Market. Arggh!
These are GREAT times to be a trader! With the market so shaky, so sensitive to information and world events, there is great volatility and wide swings in the market that provide ample opportunities for quick profits. I consider us, as traders, to be pirates, raiding, pillaging, and looting a battered economy. Cheap stocks, mergers, commodity prices way above previous records, and the like have provided us the opportunity to simply come ashore and take what we please. But, as there is plenty of booty to be gotten, do we want to leave it all on the deck of the ship, where it can be snatched away from us by some other shrewd swashbuckler? Or do we want to bury some of the haul in a treasure chest at the bottom of the sea, where it won't be touched until we come and get it?
If you are not taking profits off the table when you are continuing to make money, you set yourself up for disaster. With the markets as volatile as they are, you had better be moving profits into a secure account on a daily basis, whatever the percentage may be. Therefore, if the market turns, if you just happen to be making losing trades for a period, or for whatever reason you begin to lose money, you can have some money in reserve in order to maintain your lifestyle. I don't need to tell you that there are numerous types of retirement funds, annuities, and interest bearing accounts that are available and you need to contribute to those on a regular basis as well.
The beautiful thing about a down market, at least from a trading standpoint, is that there is tons of money to be made. Mark Lane, one of the best traders I know (although he claims not to be), a titan from the Crude Oil ring on the New York Mercantile Exchange, told me that traders like action, no matter which way it is. Investors are the ones who need a direction, preferably up. These days, there is PLENTY of action. But, just as many a pirate loves to be in the middle of the action, they often meet a sudden and tragic, if not glorious demise because they were not careful. Hijacking that next ship or storming that next port can be deadly if the risks are not calculated and if there is nothing to fall back on in reserve should things not go as planned.
Passing on Some of the Responsibility
Mr. Bookstaber advocates against over-regulation because he feels that it makes certain situations more complicated than they need to be and therefore more vulnerable to failure. However, if we are to truly learn from our mistakes, those who are ultimately in power, and by this I refer to the government and its various entities, need to also recognize when enough just might be enough. We reject the notion of our government being too involved with our businesses because we feel that they will impose standards that will stymie our abilities to be as profitable and successful as we can be. But, just as the Parks Service will systematically ignite fires and cut down trees, doubtlessly killing the habitat of thousands of tiny organisms, in order to prevent a catastrophe in the future, maybe our government can step in from time to time and purposely slow our economy just a little bit if it seems like it is getting a bit "overgrown" so that we can avoid a major meltdown. Furthermore, the government should be on the lookout for those who act recklessly in the markets and exhibit careless and irresponsible behaviors that can ignite a dangerous chain reaction that may doom the financial landscape.
The beautiful thing about a down market, at least from a trading standpoint, is that there is tons of money to be made. Mark Lane, one of the best traders I know (although he claims not to be), a titan from the Crude Oil ring on the New York Mercantile Exchange, told me that traders like action, no matter which way it is. Investors are the ones who need a direction, preferably up. These days, there is PLENTY of action. But, just as many a pirate loves to be in the middle of the action, they often meet a sudden and tragic, if not glorious demise because they were not careful. Hijacking that next ship or storming that next port can be deadly if the risks are not calculated and if there is nothing to fall back on in reserve should things not go as planned.
Passing on Some of the Responsibility
Mr. Bookstaber advocates against over-regulation because he feels that it makes certain situations more complicated than they need to be and therefore more vulnerable to failure. However, if we are to truly learn from our mistakes, those who are ultimately in power, and by this I refer to the government and its various entities, need to also recognize when enough just might be enough. We reject the notion of our government being too involved with our businesses because we feel that they will impose standards that will stymie our abilities to be as profitable and successful as we can be. But, just as the Parks Service will systematically ignite fires and cut down trees, doubtlessly killing the habitat of thousands of tiny organisms, in order to prevent a catastrophe in the future, maybe our government can step in from time to time and purposely slow our economy just a little bit if it seems like it is getting a bit "overgrown" so that we can avoid a major meltdown. Furthermore, the government should be on the lookout for those who act recklessly in the markets and exhibit careless and irresponsible behaviors that can ignite a dangerous chain reaction that may doom the financial landscape.
Our businesses and the public will never go for that. It's too socialist, too un-American, and we are all, at heart, quite greedy. So, while one of our inalienable rights is the unhindered pursuit of happiness, we would never allow our government to actually step in and control or limit our ability to accumulate wealth.
If this is the case, however, then we must own up to the idea of a financial bust somewhere along the line and while they may cause some pain, we need to accept them and see the opportunity for new life and greater prosperity that awaits. Otherwise, while we keep trying to avoid them, delay, prevent them, whatever the case may be, we are simply fighting nature, a fight that we will never win, and setting ourselves up for greater misery in the end.
To Your Health
So, if we know that a financial crisis is always looming, why do we even try to avoid them? Well, that would be like saying if we all know we are going to die someday, why even try to live a healthy lifestyle? The point is, to make things easier on yourself while you are here. Saying that economic prosperity should last forever is like saying that people should live forever. Maybe, we as a species can be around for millions if not billions of more years. But, like all things, our demise will come. Not to be too sad and grissly here, but knowing that our time on earth is very limited as well, we still try and do things to make our lives better while we are here, the whole time knowing that something will eventually get us in the end. We take care of our bodies, eat right, form loving and supportive relationships, get enough rest, cultivate hobbies, skills, and interests; all in the name of a healthy and fulfilling existence.
However grim, my college psych professor is right in that each of us will be gone sooner or later and there is no real way to tell which affliction will be the last. However, we still maintain ourselves properly in order to prolong our existences.
Grim as well is the fact that economic ailments come at us from all angles, usually when we least expect it. Still, our financial health can last at least as long as our physical health if we take care of it, recognize that dangers do exist even if we cannot always accurately identify them, and make sure that we are prepared to deal with hardship by protecting our assets while we have them. That way, even if we cannot always prevent the malady from arising, we can at least prevent it from infirming us beyond repair.
So which will be the last financial disaster that finally does us in? None. There does not need to be if we accept the risks that our economy is subject to and manage our finances in accordance.
If this is the case, however, then we must own up to the idea of a financial bust somewhere along the line and while they may cause some pain, we need to accept them and see the opportunity for new life and greater prosperity that awaits. Otherwise, while we keep trying to avoid them, delay, prevent them, whatever the case may be, we are simply fighting nature, a fight that we will never win, and setting ourselves up for greater misery in the end.
To Your Health
So, if we know that a financial crisis is always looming, why do we even try to avoid them? Well, that would be like saying if we all know we are going to die someday, why even try to live a healthy lifestyle? The point is, to make things easier on yourself while you are here. Saying that economic prosperity should last forever is like saying that people should live forever. Maybe, we as a species can be around for millions if not billions of more years. But, like all things, our demise will come. Not to be too sad and grissly here, but knowing that our time on earth is very limited as well, we still try and do things to make our lives better while we are here, the whole time knowing that something will eventually get us in the end. We take care of our bodies, eat right, form loving and supportive relationships, get enough rest, cultivate hobbies, skills, and interests; all in the name of a healthy and fulfilling existence.
However grim, my college psych professor is right in that each of us will be gone sooner or later and there is no real way to tell which affliction will be the last. However, we still maintain ourselves properly in order to prolong our existences.
Grim as well is the fact that economic ailments come at us from all angles, usually when we least expect it. Still, our financial health can last at least as long as our physical health if we take care of it, recognize that dangers do exist even if we cannot always accurately identify them, and make sure that we are prepared to deal with hardship by protecting our assets while we have them. That way, even if we cannot always prevent the malady from arising, we can at least prevent it from infirming us beyond repair.
So which will be the last financial disaster that finally does us in? None. There does not need to be if we accept the risks that our economy is subject to and manage our finances in accordance.
