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.