Here are some things to remember about the present financial crisis. If you keep them in mind, it won’t help you much, but you’ll be right.
1. Stay ignorant. Finance in general, and sophisticated financial instruments in particular, are designed for the purpose of being hard to understand. The first person to understand them makes a ton of money, and a lot of other people lose. (Sometimes the economy collapses too, but, you know.) Finance is like a big puzzle contest with a few winners and a lot of losers.
The point is this: once you try to figure out what’s going on you risk getting sucked into the game. You’ll think you’ve got the game figured out, and the guy sitting across the table from you will let you win a few hands, but in the end BOOM! you’ve lost everything.
Unfortunately I haven’t figured out a way of staying out of the game.
UPDATE: I can’t believe how right I was:
George Soros, the prominent financier, avoids using the financial contracts known as derivatives “because we don’t really understand how they work.” Felix G. Rohatyn, the investment banker who saved New York from financial catastrophe in the 1970s, described derivatives as potential “hydrogen bombs.”
And Warren E. Buffett presciently observed five years ago that derivatives were “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”
“I was in this game for money,” Lahde, 37, wrote in a two-page letter today in which he said he had come to hate the hedge-fund business. “The low-hanging fruit, i.e. idiots whose parents paid for prep school, Yale and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other sides of my trades. God Bless America.”
2. Tranches are bundles of loans mysteriously sorted and packaged according to how risky they are. Large corporations buy tranches and use them as collateral to borrow money from other large corporations. These corporations are owned partly by individuals, but mostly by still other large corporations, which themselves might very well also be owned by more large corporations yet. In the end you have millions of actual home loans at one end and millions of actual individual investors at the other, with an undecipherable maze of legal entities and financial instruments linking them. (You might as well discuss quantum theory, it’s easier). Few or none of the flesh and blood owners have any idea what’s going on, until finally one day they wake up and BOOM! their money is all gone. (If anyone knows what happened, it’s probably the managers hired to manage these various legal entities, but they have just voted themselves enormous bonuses and never have cared to socialize or communicate with the pitiful rabble who own the stock anyway.)
Economists don’t worry about these things, though. (Nader does, but Nader isn’t an economist and he’s crazy too.) Economists worry about welfare Cadillacs, transfer payments, and waste in Democratic budgets. Government, in sharp contrast to the free market, is inefficient and corrupt and can never do anything right.
3. The way to handle economists and financiers is to let them fight it out among themselves until there’s only one left alive, and then kill him or her. That isn’t always enough, however – if you read the papers, you know that J. P. Morgan still controls us from beyond the grave (presumably with the help of the Templars, the Bavarian Illuminati, Hassan ibn Sabbah, and the Elders of Zion.)
4. The two biggest political decisions of the last 30 years or more were made in panic mode on the basis of misinformation and/or scanty information. If Bush and Cheney are counted as elected officials, they’re the only ones who had any significant input on these decisions. In the same way that Scalia rigorously follows his legal philosophy except when something serious comes up (e.g., Bush-Gore 2000), our system of government is democratic and strictly follows proper legal procedures except when an important decision needs to be made.
Despite the fact that they’re almost certain to have control the executive and both houses of Congress three months from now, there’s considerable doubt as to whether the Democrats actually exist.
5. Greenspan was a genius until he wasn’t, but he may still be a genius who’s just decided to burn us. He apparently did his best to throw one or two Presidential elections to the Republicans, but he’s non-partisan because the Republicans are ultimately too liberal for him. During his unelected tenure, if he wasn’t the second most important official in American government it was because he was the most important. The creative destruction and immiserization we’re about to see will bring joy to his Randian heart.
6. Likewise, economics is a powerful science until it isn’t — i.e., until the bubble pops. Bubbles are psychological in origin (and thus of no concern to economists), so it’s up to the psychologists to explain them. They can’t do it, though, because they’re losers and only slightly less worthless than sociologists. Economists are the only real social scientists, but they have to rely on those other guys who always fuck everything up. (Like lawyers, though, economists still do have some useful knowledge, and if you can afford one, at times he or she can get the job done for you.)
In short, no one knows WTF is going to happen. Praise the Lord, we’re all brothers and sisters in ignorance! (And you needn’t fear the economists – they’re as frightened as you are, and only the Chicago School economists have a taste for human flesh).
7. Obama and the Democrats are fortunate enough to have been chosen to preside over the collapse of Western civilization. Keep an eye out for the seven-headed dragon rising from the sea.