An epic tale of systemic poor judgement

A colourful and honest rant on the Big Picture this morning is a refreshing read: Idiots Fiddle while Rome burns: ” This is financial incompetence writ on a scale far grander than anything seen for centuries”.
It reminds me of something I have been asking my speaking audiences for several months now: why are regular people and investors not mad as hell at banks, brokers, regulators and our so called leaders? Capital markets have had plenty of dumb, wasteful and greed-fuelled disasters in our history, but recent years will go down as one of the more epic episodes. Ritholtz puts it very well:
“Books will be written about this period of time, and our descendants will wonder in awe as to how this was allowed to happen. Tulips got nothing on us! It’s not just the total dollar value of the losses that have exceeded all other global fits of financial madness combined, but rather, how so many warning signs were so blithely ignored by so many and for so long. What was wrong with these people, the authors and historians will wonder. Did the antibiotics in the food supply drive them mad? Did the High Fructose Corn Syrup compromise their ability to think? Some form of viral plague? Roid rage? What else could have created such a mass delusion amongst not just the populace, but their leadership and institutions? ”
Two years ago I wrote that watching this insanity unfold around the world was like being the only sober one who points out that their family members are becoming drug addicts. While they are still in denial, others may shun you as judgmental and alarmist. But when the inevitable hell does break lose, others are shocked and want to know how you saw disaster looming.
The proverbial hell is now breaking lose. In a well reasoned series of articles over the past several months, RGE Monitor Nouriel Roubini – Chairman of RGE Monitor and Professor of Economics at the NYU Stern School of Business – has argued that the U.S. is experiencing its worst financial crisis since the Great Depression and will undergo its worst recession in the last few decades. It is useful to read his recent summary of the fall-out and ramifications for capital market investors here. Please do read it.
And before we Canadians give a smug glance at the reckless US, we must see that we too have succumbed to folly and reckless indulgence over the past few years. Our national saving rate has been falling since 1980 and was virtually zero the past couple of years.
Our national mortgage insurer CMHC last week announced it was tightening lending standards in Canada to “avoid a US like real estate bubble”. But recall that it was only a couple of years ago as Canadian real estate soared that the same CMHC watered down all rational standards and opted to guarantee 0% down, 40 year amortization mortgages in the first place. This added fuel to already over-heated markets. They did this following the US model and pretty much in line with the peak of bubble housing prices. What the hell were they thinking? Where are our sober leaders and keepers of the public trust when you need them? Their well-meaning regulatory revisions now are reactive, and perfectly timed to exasperate the credit crunch from here.
Economist John Kenneth Galbraith once wrote: “who is to make wise those who are required to have wisdom?”
Free markets are a nice idea, but in the end our laws must set out minimal standards of governance to reign in our human tendency to wanton spending and self-destructive behaviour. Most regular citizens don’t know what is best for them in this. It is up to the government to set rational, paternalistic limits on the financial sales world. We do it on drugs, cigarettes, gambling and alcohol use. There is a societal interest in limiting our use of credit and risk too. Self-preservation demands that we do. Our myopic, profit-hungry financial institutions and banks are certainly not the ones to set the rules on this. Dressing a shark in a flashy suit and tie does not make them any less of a shark.
For the past few years we have literally borrowed consumption from the future and spent it. Now comes the inevitable pay-back and growth going forward must suffer the consequences. We have had a systemic failure of good judgment. The cost to clean up the mess will be great. Hopefully we will learn and retain (at least for a while) some valuable wisdom.