How did we go so far off the tracks? He offered a few nuggets that seemed to explain the credit bubble. To reiterate, there really was no adult supervision. The guys putting these packages together certainly had some sense that they were crazy but nobody said stop. Government regulators being paid $100k couldn't tell guys making $20 million to take a hike. The senior managers loved the money flows. Cubicles--millions of cubicles--were staffed with engineers, chemists, physicists, and mathematicians from the best colleges in the country with no knowledge of the history of markets, fat tails, and past human follies, only how to financially engineer.This kind of commentary has the insight of somebody fairly intimate with the situation, but it also annoys the heck out of me, because it completely misses the point. Yes, a lot of "illegal" stuff went on, and "rules" were broken. Common sense got checked at the door and a lot of stupid things were done. Really?! You don't say... Newsflash everyone: politicians are crooks, regulators frequently fall down on the job, and Wall Streeters are out to make lots and lots of money any way they can. Who would have ever guessed? Not to mention the fact that the guys who write the rules, a.k.a. our illustrious politicians, were doing a full court press to get more money into subprime by strongarming lenders into lending to preferred demographics and passing out government guarantees on Fannie and Freddie debt. And the answer is supposed to be more regulation? So there will be more rules to ignore next time? Adult supervision? Where are the adults? I don't see any. All this garbage completely misses the point. We should not be asking how this crisis was allowed to occur. I should think that would be obvious at this point, and that there is really nothing that anybody can do about natural human tendencies, except beat on some humans, which isn't allowed and probably wouldn't work anyway, though it might releive some tension for a little while. We should be asking how it was able to occur. Such horrible investments as is guy is describing should have come unglued long, long, ago, yet the housing bubble has been 20 years in the making. Ask any newbie forex trader how long a 10,000x position is likely to look like a smart bet, even if it was one at the time it was made. How about the odds of several million such positions lasting for years? The entire mess was dependent on a continuous inflow of money, provided courtesy of the Federal Reserve. It could not have occurred otherwise. Rules, regulations, and depending on man's supposed innate goodness to keep markets working does not work. Actually losing money when you screw up, at about the time that you screw up or soon after, and not being able to foist your losses on others works only slightly better, but at least it is something. So far it is the best we've got. Providing a continual stream of new money into markets and blanket government guarantees isn't helpful. To be fair, later on in the letter the issue of excess money is addressed tangentially:
The money overwhelmed the system. It was like when the computers gained consciousness in Terminator. The money pushed all regulations aside. It bought deregulation, politicians, and anything else necessary to keep the money machine growing. Nobody dared yell stop because so damned much money was being made.But this still misses the point. Which is: NO FED, NO EXPANDING MONEY SUPPLY, NO PROBLEM. Do we really want the government deciding what kinds of investments we are allowed to make, and enforcing rules willy-nilly? Do we really want politicians in charge of the money supply? It hasn't worked yet. I do not see why it ever should. Maybe its time to try something new. Or something old, rather... Gold, anyone?