A few years back, during the good old days of the housing bubble, I read an article called "the great moderation". It was a phrase coined by economists to describe how economic recessions were becoming shorter and more shallow and recovery periods were longer, at lower, more sustainable growth rates. This had been the case since the eighties and it was supposed to continue into the future due to our new and greatly improved understanding of the economic cycle. This allowed the Government and the Federal Reserve to manage events in a way that minimized the painful ups and downs of our economy. I felt a warm fuzzy feeling while reading this, let me tell you, we are fine tuning this economic beast.
The Federal Reserve's head, Alan Greenspan was given a lot of credit for being one of the forces that maintained this greater stability during different political administrations. He quickly addressed international crises as they arose. The Asian crisis. Russia. Argentina. Long Term Capital Management, the hedge fund that failed so epically that it almost took down our entire financial system. Trillion dollar bets the wrong way are wild beasts.
Alan Greenspan had an aura of invincibility for over a decade. For me, he was one of the real life "men in black". A guy that kept us safe at night while he dealt with threats that I did not fully understand. He was called the "Maestro" as he orchestrated monetary policy using what it looked like at the time, perfect judgement.
He warned us of the "irrational exuberance" of the markets during the dot com era. He lowered interest rates to minimize the post dot com and 9/11 recession. Not a very deep downturn given how big a mess that was. Dot com bust, 9/11 and the spectacular fraud of multiple companies such as Enron, Worldcom and others, that for a moment, shattered our confidence in the economy. We moved away from this negativity in just about three years by building millions of new homes and borrowing at low rates by using our house's equity as an ATM.
The Maestro did what he needed to do masterfully, including his uncanny ability to keep his hand extremely close to his vest. He could testify before Congress for hours at a time without actually saying anything useful to anyone that tried to anticipate and benefit from his future actions. He knew that telegraphing his next open market move would diminish the impact of his policies. Secrecy and misdirections were required to accomplish his goals. Here comes the Maestro. He played the game well.
Alan Greenspan got it right about the dot com bubble, but he did not see the real estate bubble coming. His thought was that all real estate markets were local, so a synchronized downturn in the real estate market would be impossible. Financial institutions were able to bundle shitty mortgages from different areas across the country and be able to tell the regulators with a straight face than the sum total of this was NOT a shitty bond issue. Geographical diversification of poor assets was good enough to deserve an A+ bond rating. All real estate markets are local, yo! People across the world ate it up.
Later on we learned that it is possible for all markets in the world, real estate or otherwise, to actually freeze in synchrony. We had what I would call, in technical economic terms, a "holy shit" moment in 2008. You don't want to be the guy without a chair when the music stops. The mess was so big that the Government had to intervene, both under Bush and Obama, to prevent a complete system failure. Big messes are the great equalizers. Politics did not matter when we faced a return to the 1700's with no well funded financial market. We are now in a new world as a result of this intervention. But I digress....
I listened to Alan Greenspan talk about his mistake of judgement a few months ago. It made me feel bad because he is starting to sound like a frail and apologetic old man. He was sheepish about having missed that the economy is now global and all markets are connected. He had his "holy shit" moment and decided that he was going to develop new analytical tools to further understand the new dynamics in the economy. Heavy duty analytical models that is.
I love Alan Greenspan. I still think he deserved the moniker of "Maestro". I think he fell prey to his own intelligence. The more complex our thinking, the more we lose our grounding in reality and go directly to the imaginary world of thoughts and concepts. Didn't all this 10-15% yearly increase in the prices of houses sounded to you like something that could not continue forever or end well?
I've learned one thing from working with retired military folks. They base their actions on simple, common sense principles. They keep their thinking grounded on reality and maintain a clear head while dealing with the most complex, stressful situations a person can possibly go through. Fast changing, life or death situations. This thinking is the result of a Darwinian process that weeded out every other approach. A simple, well grounded approach followed by quick action is the key to survival.
As we fall in love with higher education and intelligence for the sake of being clever, the more ungrounded our thinking becomes. When purely intellectual concepts dominate our mind, they cloud our judgement, leading us into actions that can be spectacularly wrong, specially in this world were millions of people can do the same thing in sort of a human stampede.
The death of common sense will bring about more dramatic ups and downs, as we face the inevitable "holy shit" moments, when a clever mental construct gets demolished in a high speed collision with reality.
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