There is plenty of finger-pointing this week around the world. Capital marketing are convulsing, investor losses are mounting, politicians are speaking out and litigation lawyers are rubbing their hands in anticipation.
As the WSJ outlines this week CREDIT AND BLAME
How Rating Firms' Calls Fueled Subprime Mess, it took more than one person to cause this riot. The participants have been far and wide, from gullible and wilfully blind to the greedy and downright fraudulent.
The Federal Reserve has stepped in to the rescue in other periods like this, most recently in 1998, 2001, but I fear this has not been a good thing in the long run. As every parent comes to know, cleaning up after our children repeatedly is no way to train and fortify them. Rampant reckless risk taking is a dangerous business. When people are saved at the final bell, no lasting lessons are learned to help them make wiser choices for the future. This is one of the main reasons that we find ourselves back today in worse shape than we were at the peak of the last market bubble just 7 short years ago.
The Bernake led Fed may be less inclined to race in with imminent rate cuts to pull markets out of the fire this time. At some point pain must be felt to restore some equilibrium and dissuade distructive behaviour going forward. And then there is the fact that inflation is still above target and rate cuts will further depress the down-trodden US dollar.
I am reminded of what Galbraith wrote about in “The Great Crash.” He describes how at in the beginning of the market crash in 1929 there was must hope and rumour that at any moment someone big and powerful would step in and save the day by putting a stop to the market freefall. Widely it was hoped that there were big men about who could put stocks up and put stocks down and that at any moment the cavalry would arrive to stop the losses and save the day. Of course, no saviour materialized and it took more than 2 years and -89% losses before markets were able to work off their overhang from the post-29 exuberance and start slowly building their way back.
Mature and realistic excpectations are needed. High-risk rollers will have to learn this lesson the hard way. Money cannot be free and unlimited without the nasty reprucusions of waste and inflation. It will take some time to work off the hang-over of the past few years. Patience and prudence and maturity will be rewarded.
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