More About the Sky Falling

I'm sorry, I can't resist lingering over our economic crisis, though not, perhaps, the main topic of this blog, but hard to avoid. My 'what happened' post of a couple weeks ago produced some good comments and a lot of readership. And so yesterday, as I went over the Sunday New York Times, I hit upon one piece, by Ben Stein, that struck a cord. He called it You Don’t Always Know When the Sky Will Fall.

After apologizing for not having foreseen the crash …

I don’t have any magical powers to foresee the future.

He goes on to highlight the "catastrophic mistake" …

In this case, I did not foresee the catastrophic mistake, as I view it, by Treasury Secretary Henry M. Paulson, Jr. to allow Lehman Brothers to fail. That failure left a gaping hole in the financial services industry, and blew away confidence that the Feds knew what they were doing.

The solvency crisis exploded when, in mid-September, Mr. Paulson allowed Lehman Brothers to die a sudden death. I would never have believed that it could happen, which shows one of my many limitations as an economist and a human being. I assume that the future will be much like the past, but sometimes it isn’t.

After Lehman, I felt sure that the government would realize its mistake and issue blanket solvency guarantees to banks. But that didn’t happen, the stock market fell apart, credit went icy cold and the wheels started to come off the economy. This also took me by surprise.

Stein quotes economist Anna Jacobson Schwartz as noting that this is a solvency crisis. Banks had money, but didn't feel safe lending it.

In fact, bankers have had so many losses and faced so much uncertainty that they dared not lend, for fear of killing their banks with bad loans — so we have actually had a solvency crisis.

He goes on to talk about the failure of debt rating services to accurately rate debt instruments properly, and then concludes (before a defense of big oil, which seems out of place to me) with the following:

This is perhaps the main lesson of this whole experience. It is basic but still unlearned: human beings must have savings. This is not just a good idea. It’s the difference between life and death, terror and calm. So start saving right now, and don’t stop until you die.

3 thoughts on “More About the Sky Falling

  1. Your "Sky is Falling" posting struck a responsive chord, because I wonder how much
    of a "self-fulfilling prophecy" the daily media coverage causes.

    In particular, as a consultant/mentor to nonfiction authors interested in writing books to promote their business, I wonder how many otherwise-successful entrepreneurs are deciding to put off their publishing dreams and "prepare for doomsday" on the basis of media accounts.

    To me, the issue boils down to control. "What is can an entrepreneur, or future-author, control TODAY, and what can't they control?" What can they control, and what can't they control?

    Most self-employed professionals–those who can best benefit from a published book–can't control the stock market. But, they can control their decision whether or not to spend a half-hour watching a Seinfeld rerun versus investing a half-hour reviewing their book proposal, or any of the other planning, writing, promoting, and profiting tasks associated with a published book.

    I posted on the "When is the right time to write a book?" topic at the Published & Profitable blog at http://tinyurl.com/Best-time-to-write and would appreciate your comments–for or again.

    Roger

  2. Buffet knew.

    It's easy for Americans to fear the unknown right now, but if you look at these stock prices relative to historical averages, even if we aren't at the bottom, we are close enough that only someone about to retire should consider being conservative with their money.

    I agree completely however that Americans need to save more. Not as a reaction to some real or perceived social panic, but because future generations of Americans are depending on us to get smarter.

  3. That's nice of Ben Stein to say that Americans should be saving, but where CAN we safely save?

    In banks? They've been folding, or are worried runs on their reserves, or about insolvency.

    In the stock market? Ha!

    In hedge funds or 401(k)s? AP reported that Retirement accounts have lost $2 Trillion – so far. And that was on Oct 8.

    Maybe we need to return to saving under the mattress or in a precious metals coin horde like medieval Saxons or Vikings? If, that is, we could find any coins with any precious metal in them.

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