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?


Book: Dumb Money, ch 2

Chapter 2 is The Era of Cheap Money. Daniel Gross explains that bubbles require two factors: new economic assumptions and new tools. The 2008-09 bubble was built on “new and improved” econ assumptions of cheap money but mostly on risk-manipulating innovations that made money appear even cheaper.

I agree with what I think what he’s saying: Efforts to systematically, artificially grow an economy too high, too fast are recipes for disaster. One reason I agree is that I appreciate the business model of a former employer.

McMaster-Carr is the #2 distributor of industrial supplies, behind Grainger. It meticulously managed growth to be sustainable and without risk of deteriorating its phenomenal customer service. In the mid-90s McMaster mailed its iconic catalog annually to generate sales, almost exclusively via inbound phone calls to well-paid staff whose job was to provide Nordstrom-quality service. The company knew how many inbound orders that each incremental catalog would yield and mailed to only enough new recipients that its “sales” staff and operations infrastructure could service without leading to depressed service.

Non-market-priced cheap money facilitated unprecedented and unchecked growth in home ownership, stock ownership, conspicuous consumption, overcapacity of retail stores and restaurants, exurbs, commuting times and the assumption that bad times won’t happen.

Looking forward, we need some new ideas about regulation. Even Alan Greenspan has acknowledged that he overestimated the rational, free-market theories.