Thoughts on the economy

I interrupt the usual stream of events from our life in New York to bring a few thoughts on the current economy…

In light of the woe in the financial markets, today has brought a rather entertaining and enlightening chain of emails from my former roommates from UNC.  We took a break from our usual daily fare of Fantasy Football trash talk and personal insults to take a hard look at the issues which are straining our country’s economy.

Let me be the first to say that the current credit crisis is orders of magnitude above my head in terms of overall complexity.  The Washington Post asked a bunch of prominent businesspeople to recommend a book for the general public to read to get a better understanding of the current situation.  Mark Cuban’s response was the best (and this was on Sept 4th, well before the shock of Lehman and AIG):

I don’t think there is such a book. In my humble opinion, people who actually believe they can understand all the issues are the ones that got us to where we are today. In reality, there are so many variables and so little data, it’s all a guess. I don’t think a book exists that can explain it. Is there a book out there called “No One Has a Clue What Is Going On and the Whole World Is Guessing”?

While there’s no way to describe in full detail exactly how we got here, one thing has become abundantly clear.  This whole crisis is due in large part to a refusal, by players all along the finance value chain, to accept personal responsibility for their decisions.

What do I mean by this?  There was an utter lack of personal responsibility from a whole host of individuals who took on mortgages and home equity loans that they knew full well they wouldn’t have the income to support (putting all their hopes in a perpetual rise in house prices).  Then there’s the lender who provided the loan, who shook off all personal responsibility to properly underwrite the deals because they knew they were going to package and sell the loans anyway.  Then there’s Wall Street, which packaged bought and sold these instruments to the tune of record profits, with almost nobody willing to take the personal responsibility to understand the inherent risk associated with the exotic securities.  All along the chain, it’s like everyone was printing money for free – they had found the proverbial money tree – and took no responsibility for understanding that the tree was simply a mirage.

The result of the whole charade is that it’s simply impossible to blame one party for the mess we’ve all gotten ourselves into.  And yet, based on the talking heads in the media and the politicos in Washington, that’s precisely what’s happening.  Wall Street (and especially the millionaire execs) is a prime target.  So is President Bush.  No, it’s short sellers that were the problem.  And the lack of regulation.

Do you see what’s happening – we’re simply refusing to accept responsibility yet again.  The same core problem which brought us to this point is the same way we’re choosing to react to the issue at hand. 

So what’s the takeaway for us?  Realizing our mistake won’t change the current situation and it looks like taxpayer money will end up being used in an attempt to stem the issues.  I can’t say with certainty what I think is the best solution to this whole mess.  I have no idea how to best protect your personal portfolio or whether the bailout plan is going to work. But I do know that a recovery will start with personal responsibility – and that means from us.  A good start would be spending less than we make – or as the old fashioned call it, saving.

Now that’s change I can believe in.