Tuesday, March 18, 2008

The Sky IS Falling

Covering the economy and the financial markets is not usually what I do. It takes time, effort and a lack of cynicism over time to stay engaged in following the financial world. You can't walk around thinking it's all just a poorly laid out casino where even the casino workers have trouble remembering the names of the games.

So, it's a bit of a surprise that I find myself saying I saw this one coming. I had good connections on this one. Some of the work I was doing exposed me to some of the casino workers. I saw their fear. I knew they were serious when they said 'we don't how bad it is'. These were players at big, well known casinos - not Bear Sterns, but like Bear Sterns - and originally they were talking about their exposure to asset backed paper - the original bet that started the melt-down we're all in.

The other thing I had exposure to was supposed experts analyzing the situation and ALWAYS being wrong. Knowing they were wrong was easy - month after month they've had to swallow their words from the month before. A nit of a problem that was supposed to be done with by Labour Day just kept getting worse and worse. Ultimately but only recently, the analysis (of I presume really bright people) has given way to what's now dead obvious - we are in a serious mess.

I'm sure there's a need/tendency/instinct in the financial world to be overly optimistic even when things don't look so good. Running around saying the sky is falling is probably a great way to get the sky to actually fall. But come on.

Here's an example. Do you think the US is in recession? If it's not, what do you think the chances are that will go in recession? Right. There's about a 100% chance. Yet, take a look at the BS still going on about a US recession. It's not like we're 'tipping towards it'. It's like we went over the cliff a while ago and are hurtling head long towards a deep, dark valley floor that's not just going to whack those crazy Americans, but everyone else, everywhere else too.

But I digress.

One of the great things when really bright people get smoked with reality, is how good they are at backwards looking analysis of stuff they should have seen in the first place. That 20/20 hindsight thing.

Fortune has a very good article called The End of Wall Street as We Know It on-line right now and probably in the magazine. Overlooking the fact they missed all stuff up til now, the article is an interesting dissection of financial 'powers' and the forces at play that got us where we are now.

A big one - and I've always said this - is performance compensation in the form of huge bonuses. I worked with a guy years ago who always looked for whatever 'goofy behaviour' would be driven from basic and sometimes simple looking decisions.

Well guess what?

Paying CEO's and traders millions and millions of dollars for taking huge risks is going to drive goofy behaviour. And it has. There shouldn't be any surprise that it has blown up. But there is.

Do you think the financial players learn from this? No. Not a hope. They will tighten up. Measure risk differently. Value it more harshly. But with the gazillions of dollars currently going into the system to keep it going, fuel for the next fire is already being pored.

As soon as there's a chance of getting rich again, the same goofy behaviour will take over. And a new set of billion dollar brain surgeons will be born. Just watch.

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