One Year Later: What Have We Learned?
We take stock of what has changed and what's been learned.
One year. 365 days. 8760 hours. 525,600 minutes. 31,536,000 seconds. Measure it any way you want but time passed quickly since we offered that War is Hell.
We opined at the time that the death of Lehman Brothers, while tragic and sad, wasn't the root cause of concern; that other elements, including hundreds of trillions of dollars in complex derivatives tying the global financial machination together, were the troublesome seeds of contagion in a world full of over-extended obligations.
As the 'Ville was ahead of that curve, we spent countless hours attempting to help Minyans navigate the financial conflagration. It stands to reason that on the one-year anniversary of the heart of the shatter, we take stock of what has changed and what's been learned.
Two weeks after we proactively mused something seismic was afoot, the proverbial schvitz hit the fan. We offered one of two things would occur: a credit cancer that would phase through the financial body and pave the way towards eventual globalization or a car crash where we would see credit seize, capital markets freeze, price discover permeate and social mood shift as a new world order takes root.
To be clear, I believed at the time that something needed to be done to stave off a cataclysmic crash, one that would suck everything from General Electric (GE) to General Motors (GMGMQ) to Citigroup (C) to Bank of America (BAC) to Morgan Stanley (MS) into a vortex of insolvency that led to socioeconomic anarchy. And I'm not exaggerating; that would have likely happened.
I don't claim to know the delicate mix of assistance and punishment that should have been administered. In a perfect world, it would have been just enough to keep the economic patient alive while force-feeding bitter pills to those culpable; a lens that extended from consumers over-extended on credit to institutions that engineered financial markets to policymakers compliant by acceptance to the CEO of The United States of America.
The pebble in the pond that caused the ripple heard 'round the world was American Home Mortgage. After the fact -- after the tsunami was upon us-- the government rolled boulder after boulder into the water with hopes of reversing the curse. They served their purpose but it arrived with profound costs and moral hazards.
We spoke of two potential paths at the time. One was orderly debt destruction, which while painful, would allow for an inside-out globalization. I used the Internet analogy; just as everything the Internet was prophesized as being proved true, but not without a tech crash, so too will globalization, albeit not without debt destruction.
The other was isolationism and protectionism as countries protect their own at any cost. We touched on this at the beginning of the year in Ten Themes, offering that if calmer heads don't prevail and the global community turns for the worse, history books, with the benefit of hindsight, might point to Shock & Awe as the beginning of WW3.
So, what's actually different one year after the fact?
- The government bought the cancer, sold the car crash and staved off financial collapse.
- The elasticity of debt morphed into an elasticity of deficits, pushing our obligations to future generations and lowering their standard of living.
- A financial future once predicated on the decisions of policymakers has been outsourced to foreign holders of dollar-denominated assets.
- The fear of losing is now the fear of missing.
- While select circles forecasted the collapse of the financial system, there is uniformity in the belief that we've sidestepped a cataclysmic crash.
To be sure, a case can be made for continued strength in asset-classes around the world; that's what credit markets are telling us. Allowing for a seismic currency readjustment, we may very well forge ahead until somebody cries Uncle Sam and takes aim at the dollar.
What's amazing to this observer, however, isn't what changed but rather what hasn't.
Reward chasing is again trumping risk-management, financial professionals take home insane pay and particular prognosticators have again declared a new paradigm.
All the while, as societal acrimony builds and underlying tensions manifests, we must ask ourselves an intuitive, albeit not enjoyable, question.
If social mood and risk appetite shape financial markets, what shape will we find ourselves in on the next annual anniversary of these unfortunate incidents?
As George Santayana once said, "Those who don't learn from the past are condemned to repeat it."
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