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?


NY Times: Revenue Loss Putting Cities in Fiscal Vise

“If there’s any light that comes out of this deep national recession, it’s that people have to take realistic views of things they would not otherwise consider at other times,” said NJ Governor Jon Corzine.

New Jersey is infamous for the overwhelming number of local governments and their attachment to home rule. Common sense says we have too many chiefs and high salaries running all these towns, police and fire departments and school districts. When life was much more simple in the 1700s and 1800s, such a landscape was probably ideal. These days I doubt anyone would build a new state that way — it’s inefficient and unsustainable.

“The dire fiscal prospects have sparked a renewed interest in consolidation among New Jersey’s 566 local governments. Princeton Borough and Princeton Township held a meeting last Monday to discuss for the third time the prospect of merging their local governments. Mr. Corzine, who has long said the state has too many governing bodies, welcomed talk of mergers.”

The rallying call is to lower property taxes in NJ – which has the highest average property taxes in the US – by sharing services across municipalities. What’s the best ratio of governing bodies, chiefs and bottle washers? I think a good starting place are ratios of critical municipal employees and public-safety employees per citizen.

But how do you think we should determine these ratios?