Book: Dumb Money, ch 4

Chapter 3: The Era of Dumb Money

The era of cheap money – super-low interest rates following the 9/11 attack -was ending in 2004 and should have led to a massive slowdown in the cheap money industries of housing, autos and PE/M&A.

Unfortunately, we and our political/financial leaders acted like the party would never end and kept increasing financial leverage. This is where the Fed is supposed to engineer a soft landing. It tried (somewhat), but no one cooperated.

“Over and over again, we construct narratives to tell us why, if markets truly are efficient, numbers that seem so clearly put of whack are fine. Once the bubble is aloft, we take the delusion a step further, concluding that the recent party is a mere prelude to even greater revels … The main symptom is a compulsive tendency to extrapolate results of recent fat years endlessly into the future.”

We, as humans, are supposedly able to learn from past mistakes, helping to avoid the same mistake or at least minimize the impact of repeating it. But in environments as large and complex as our “financial system,” with international reach, countless players and rampant greed, could this kind of boom and bust really have ended differently?

If yes, how? Who or what organization(s) should have the power to hit an emergency shut-off? What is being shut off?