What Were We Thinking?

Thoughts from the Frontline (08/29/2009)
"As a culture, the current mix of generations, especially in the U.S., has made some choices, which, in hindsight, leave us asking, "What were we thinking?"

We made the easy choice, not thinking about consequences. We never absorbed the lessons of the Depression. We quickly forgot the sobering malaise of the '70s as the bull market of the '80s and '90s gave us the illusion of wealth and an easy future. And as interest rates came down and money became easier, our propensity to acquire things took over.

And then something really bad happened. Our homes started to rise in value and we learned through new methods of financial engineering that we could borrow against what seemed like their ever-rising value, to finance consumption today.

As a banking system, we made choices. We created all sorts of readily available credit and packaged it in convenient, irresistible AAA-rated securities and sold them to a gullible world. We created liar loans, no-money-down loans, etc. and expected them to act the same way that mortgages had in the past. What were the rating agencies thinking? (Oh wait, that's the same group of regulators who now want more power and money.)

Greenspan keeping rates low aided and abetted that process. Starting two wars and pushing through a massive healthcare package, along with no spending control from the Republican Party, ran up the fiscal deficits. And allowing credit default swaps to trade without an exchange or regulations.

Even as stocks have gone nowhere for 10 years, we largely believe (or at least hope) that the latest trend is just the beginning of the next bull market.

It's not like there were no warnings. There were, including from your humble analyst, who wrote about the coming train wreck that we are now trying to clean up. But those warnings were ignored.

The good times had lasted so long, how could the trend not be correct? It is human nature to believe the current trend, especially a favorable one that helps us, will continue forever."

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