Saturday, September 15, 2007
Basic point. Speculation buys up the intelligence of those involved.
The only safeguard against market shipwrecks is good market ‘seamanship’ which recognises what a wrecking coast and adverse winds and tides look like.
Unfortunately the power of money means that a period of prosperity lessens the sense of danger. So-called new financial instruments re-invent old methods of profiting from risks and those involved bask in reputations for financial genius. ‘The world of finance hails the reinvention of the wheel over and over again, often in a more unstable version’ says Galbraith.
All is well so long as the risks don’t come back to leverage disproportionate havoc, as has come about from the innovative repackaging of high risk loans in the USA. The real problem comes from the hedge funds, and from the fact that financial institutions have been borrowing and lending on packages of assets which have been packaaged and re-packaged so often nobody actually knows where the risks are, and how many times they have been multiplied by being repeatedly spread around.
‘Financial genius comes before the fall’, as Galbraith memorably summed up his argument.
One depressing component of any situation where geniuses are discovered to have the wheels coming off their cunning plans is that the Official Great And Good are required to make public pronouncements about the underlying situation being sound regardless of what the situation really is.
I sincerely hope they are this time right about the Northern Rock uproar and the associated troubles.