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When I became most motivated to write about our economic problems

December 19, 2011

Last week I ordered the February 1999 cover of Time Magazine (as seen above). There are two clear events that stand out in my memory about when my concerns over the economy elevated from a somewhat moderate concern to a very strong concern. One of those uh-oh! moments was when I first saw the magazine cover  above. The second event involved many financial commentators in the late 1990s boasting that we had entered into a new economy… an economy that would not experience down cycles going forward. The idea behind this “new economy” was that we’d never see a recession again. There would be economic growth that would never end, and a very low unemployment rate. If memory serves me right I think our president at the time made the same assessment.

If you take a look at the U.S. economy over the last 100 years, you can see that it has cycles. There are always smaller ups and downs, but the major ones, like the Great Depression and the more recent economic crisis, are generational — it takes a generation to forget.  We think we’re smarter than previous generations, and that this time it will be different.  So when I first saw this magazine cover I thought it was one of the most ‘entertaining’ covers ever, but I also felt it displayed an amazing level of arrogance. It insinuated that those driving our monetary policy were what kept us from experiencing the difficult economy that much of the rest of the world was experiencing. The fact that we thought we could manipulate the right levers and pull the right strings to avoid economic cycles is arrogant and will, in my opinion, be written about when historians look back at what we have done and continue to do in response to the economic decline. Our arrogance is so great that we continue to pursue the same economic/monetary policy even though evidence suggests the current policy is not working… and in my opinion will eventually prove to only compound our problems. 

Although they thought they could prevent the economic lows that every generation experiences, history may well prove that the three men on this issue of Time Magazine were the biggest factor in creating this financial disaster by creating an atmosphere of risk-taking and leverage in the midst of poor financial practices, decreasing oversight, and economic bubbles that undermined the world’s greatest capital markets.  

And I believe time will prove that the following is the granddaddy of miscalculated statements:  

Alan Greenspan (May 2005)

The use of a growing array of derivatives and the related application of more-sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions. … Derivatives have permitted the unbundling of financial risks. 

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