Anatomy of a financial crisis - where are we going?
"How could this happen?" - the big question in two parts:
- What was wrong prior to the crisis.
- What triggered the crisis.
Why bother with "what triggered it"; is it not fair that you react and sell all your too expensive shares when you find out? When you're oblivious then see the obvious shall you not act quickly? And anyway, any reasonable construct should withstand a sneeze.
As a good friend of mine puts it - "why all this use of "Panic"? It's nothing but good sense kicking in!"
What was wrong is slightly more interesting. Of course something was skewed, off-balance, out-of-whack: In 87 share prices had gone up faster than ever and to scary P/E ratios, in 1998 many Asian states were into bubbly growth with precious little currency reserves to withstand even the smallest pin prick, the dot-coms and their eyeballs became eventually too ridiculous for common sense, as did 100% mortgages without a credit check this last time.
But then, nothing new in that, off-balance is the normal, it is the nature of things and the reason for having markets. Actually off-balance drives us forward so do not change that.
In reality there is the only one important question that should be posed:
- Who were confused by the sudden reality shift and how did they get out of confused mode again?
Confusion often leads to participants acting alone and against each other. Confusion leads to short term action steered by self-interest without taking the usual long term or global views into account.
In 1987 it was the investors and share "market" that got confused and yelled "sell, sell, sell" even if it pushed all prices even further down. Financial institutions and governments kept a reasonably cool head and the whole thing stabilised itself in short time when the confusing lags in the systems were overcome and new and reasonable price levels were established.
In 1998 it was the financial institutions that became bewildered and confused. The process took far longer than in 1987 as financial institutions played, undermined and gamed against each others for a long while (as they're supposed to do). The turning point seemed to be when the US authorities (cool heads) pressured the largest Wall Street players to sit down, physically in one room, and bail out Long-Term Capital Management in a concerted effort.
In 2008 the confusion took one more step up the ladder, this time the governments became bewildered by the need for an immediate de-leveraging of a huge imbalance, and confusion ensued as politics entered the game. Financial institutions had to be saved and money supply increased (only universal consistent acts so far). But then the local industries became an issue, crisis-wise irrelevant but politically even more important. And that's when I see the parallel to the earlier crisis' when the players acted with short term self interest that inevitably worked against the interest of others and ultimately themselves in the long term - something that prolonged the crisis every time.
I wish I could read about something else than bailout of local industries (inevitably counter to the interest of other countries) or dramatic one-sided lowering of VAT (again, same potential negative effect on other countries).
When I hear no more "local or national interests", only about concerted global actions without a trace of short term self interest I'll declare the crisis as over.