The lesson from credit crisis: It's never different this time and geniuses aren't that smart

Posted Aug 9th 2007 5:50PM by Zac Bissonnette
Filed under: Blogs, Rants and Raves

The always-insightful Herb Greenberg had a terrific blog post today that everyone should read: Fools Rush In: Too Smart for Their Own Good.

The markets are jittery, and it seems that investors' fears are being realized: The problems in the credit markets weren't contained to the subprime sector. Why did it happen? As Greenberg writes, and he's 100% right, everyone was way too confident. Consumers thought they could handle debt loads they couldn't, and lenders thought they could too. Banks and funds thought that by bundling together loans into collateralized debt obligations, everything would work out peachy. Right. And if you believe that, I have a hedge fund you might be interested in: Long Term Capital Management.

To paraphrase the title of one of my favorite business books, genius fails -- with great frequency actually. And if something seems like a dumb idea, it usually is. Couldn't people figure out that lending people money to buy houses (or handbags or yachts) that they couldn't afford wouldn't end well? Packaging them into CDOs didn't make it any smarter.

Greenberg writes:

Happy days were here again, and Wall Street's wizards had figured out yet another fail-proof magic potion that would let this party last forever.

Unfortunately for them and everybody else: While it was supposed to be fail proof, the magic potion wasn't fool proof. And as it turns out, from Wall Street to Main Street, the fools there were aplenty.

Yup.

Tags: Herb Greenberg, HerbGreenberg, Subprime

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Reader Comments (Page 1 of 1)

8-09-2007 @ 6:44PM

michael schneider said...

Long Term Capital had too much faith in a faulty system they had worked out and then they forgot about the fundamentals of cutting losses and staying in the game. They just ignored things that were happening.

On the current markets bith Marc Faber and Jim Rogers have had very astute and correct observations even while being wrong- and too negative about some things. Both have warned to stay away from financials while many market commetnators on the TV shows keep coming on and telling people to buy financials.

Recently Marc Faber said the stock market gave off a signal to heed the Hindenburg Omen. Faber predicted the market crash in 1987 and is known for that. This year he has been too gloomy-- until now that is when he became even gloomier. A synopsis of his views and commetns on the Hindenburg Omen are available at (top of page) http://www.Barreloworld.com