Sunday, October 12, 2008

Zen and the Art of Financial Collapse

Last Friday, I twittered:
A message to panicking shareholders: look outside. The birds are still flying, the trees still standing. Nothing is different.
This was just one of the little realizations from taking a couple of days of reflection on Whidbey Island. It was interesting to read about the financial panic around the world, look at the tumbling stock prices, seeing the politicians and stock brokers' distraught faces and then look out at the water from my balcony. The seagulls didn't seem to care at all. Neither did the heron, or the trees, or the dogs running up and down the beach. Why? Because nothing has actually changed.

The companies whose value is dropping so dramatically are really the same companies they were four weeks ago. Or four months ago. For the most part, the same people go to work there and they are doing the same things. Yet, people have decided to have a nice panic. Sure, there were a bunch of greedy and either dishonest or insanely stupid people decided that it was ok to lend people more money than they could afford to pay back, but this has been going on for years. Just look at the crazy number of credit card applications that show up in every college student's mailbox. Debt has become the new patriotism. But it is really no different today than it was 6 months or a couple of years ago when things were "just fine."

The interesting thing is that the banks and others in the financial industry have decided to stop trusting each other. Now they decide to not loan money even to each other because they're afraid they might not get it back. I'm not sure where that thinking was over the past seven or so years when they were making the bad loans, but their new-found realism is causing them to start hiding their money in their industrial sized mattresses.

The fact is, though, that the core of this problem is in our minds. The vast majority of those bad mortgages will still be paid off, particularly if the people who have them can get the interest rates down to a reasonable number. A percentage of them will fail no matter what, but the actual numbers are probably not that high. This is why the government was so excited to get in and buy large quantities of them - it is a good money making opportunity if you can buy lots and lots of loans at pennies on the dollar and then end up with a 10% real default rate.

Ah, but see? I've gotten myself into playing armchair economist when the real point is this: Today is not different from yesterday. The trees are still standing, the water is still flowing and the sun will rise again in the morning. The only thing that has changed is our minds.

We just need to chill out and breathe.

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