The Longest Run

I've had the great pleasure over the past year to work on a key strategic project with some consultants from the Goldratt Group (including a trip to Amsterdam last year (to work directly with Eli Goldratt - see Jamming With Eli ). David Leonhardt's Economic Scene column in today's New York Times ( To Spend or to Save? Trick Question ) addresses the conflict many people are feeling right now between spending and saving; the paradox is that we need spending to improve the state of the economy, but we need savings to reduce personal debt, recapitalize banks, etc. Given all that, it's hard to know what to do, and the natural instinct is to hunker down and stop spending any more than is absolutely necessary. Leonhardt writes: It’s your fault. Part of it is, anyway. You, the American consumer, spent too much money. You bought too much house, took on too much debt and generally lived beyond your means. Your free-spending ways helped cause the worst financial crisis since the G...

At the New York Times, an early article from next Sunday's Magazine: The Big Fix . Absolutely worth a read. From the concluding paragraphs: The norms of the last two decades or so — consume before invest; worry about the short term, not the long term — have been more than just a reflection of the economy. They have also affected the economy. Chief executives have fought for paychecks that their predecessors would have considered obscenely large. Technocrats inside Washington’s regulatory agencies, after listening to their bosses talk endlessly about the dangers of overregulation, made quite sure that they weren’t regulating too much. Financial engineering became a more appealing career track than actual engineering or science. In one of the small gems in their book, Goldin and Katz write that towns and cities with a large elderly population once devoted a higher-than-average share of their taxes to schools. Apparently, age made them see the benefits of education. In recent decades,...

I found this fascinating quote today: If I think about all the issues we've had on wall street over the past year (see Michael Lewis and Daniel Einhorn's two part column for a great description of them), I think most of these issues have been caused by investors playing with other people's money without enough of their own net worth at stake. Financial leverage is a good example of playing with other people's money. You put up a tiny amount of your own money and you borrow the rest. If things don't go your way, you write off the little you put up and the lender takes the bath. That's been going on in the financial markets and the housing markets for the better part of ten years and we are now seeing the cost of that approach. A VC , Jan 2009 You should read the whole post.

One very succinct perspective on the causes of the current turmoil in the financial markets (from Barry Ritholtz at The Big Picture : ...the proximate cause of the Housing crisis were 1) Ultra-low rates; and 2) Abdication of traditional lending standards, thanks to 3) originators ability to resell mortgages for securitization purposes, and hence, 4) not have to worry about loan defaults. The credit crisis was caused by 1) the above securitized mortgage paper, that was 2) rated triple AAA by Moody's and Standard & Poors, which then 3) Which was then "insured" by credit default swaps (CDS) -- the unreserved for, shadow insurance products 4) whose exemption was made possible by the Commodities Futures Modernization Act. That legislation exempted these derivatives from any supervision or regulation. The lack of reserve requirements is why there is now $62 trillion in CDS, many of which will never pay their counter parties the promised insurance.

Great post on the financial crisis over at the Calculated Risk blog : The Adjustment Process . Does reading the post make you feel better? I personally find it encouraging and share the perspective that while there's much pain ahead, at least we're on the path toward eliminating an unsustainable situation.