(This editorial appeared on Manifest n6)
The surprise in the past few weeks is that people (professionals included) are surprised by the current financial crisis.
In a book titled “the (Mis)behavior of Markets” Benoit Mandelbrot argued that crisis of this magnitude took place more often than even financial models assumed and that therefore, interest rates did not fully account for the effectively much higher level of risk.
Obviously, few people have read this book, but many more people read the Economist, the Financial Times, the New York Times and the Wall Street Journal. In the period 2002 to 2005, you will find countless articles warning about the impending crisis.
Two main arguments were described in those articles: house prices were growing far faster than wages and the economy in general and secondly, the United States’ relationship with its creditors was unsustainable (to simplify, how long can China lend money to the US so that in turn, this money will be used to buy Chinese goods?).
Yet, house-buyers, house-sellers, brokers, financiers, fund managers and politicians world-wide were mostly oblivious. Everybody was making money easily and nobody wanted to be left in the sidelines.
A new book by Gregory Berns titled “Iconoclast” makes the argument anew, that, people however intelligent and individualistic they think they are, behave like a school of fish.
If everybody is doing something, I should be doing it too. It simply costs one’s brain too much energy to think otherwise or to try to see things in a different way. At any rate, there seems to be safety in numbers. This works until it works; but like in the game “Lemmings” all the individuals of the tribe eventually fall off the cliff.
So if you really want to make the most of this situation: now is the time to get a degree in real-estate, now is the time to set-up a private equity fund and take advantage of falling asset prices, now is the time to invest in financials and insurance companies; not in 2004 nor 2005 nor 2006, nor again, when the clouds will have dissipated.
— Links and information–
Benoit Mandelbrot – at Yale University
Fractal Geometry – New York Times article