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JimVanMeerten (61.99)

Are we headed for another Crisis???

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May 24, 2010 – Comments (3)

This weekend in Financial Times John Authers does an abstract of his new book: The Fearful Rise of Markets: Global Bubbles, Synchronized Meltdowns and How to Prevent Them in the Future.

Financial Times Link

The abstract is pure genius, I can't wait to read the book. To me a genius is anyone who can take complex subjects, boil them down and explain them in such simple language that even I can understand them.

He outline the problems with the markets as:

Other People's Money -- He explains how in the 1950's most people played the market with their own money. Only 10% of the NYSE volume was institutional. Now most money trading in the market is mangers playing with other people's money. Only there job and bonus is at stake.

Herding -- Professional investors all seem to go to the same investments and cause them to become overpriced. They all aim at the same bench marks thus limiting their investment universe.

Safety in Numbers -- Asset Allocation through diversification caused people to invest and take risks in investments they didn't understand. By forcing investment in assets that did not correlate to the rest of the market the new money rushing in caused a new correlation. Then when one sector fails they all fail.

Moral Hazard -- There was an impression that the markets were protected and all was safe. Someone was looking out at what was happening and someone would always bail out failures

He then goes on to offer suggestions on the solutions.

Moral Hazards -- Banks and financial institution either need to be broken up so that if they fail their smaller size makes it no big deal and go ahead and let then fail. If the shareholders are at risk, they might not allow risky ventures

Herd Mentality -- Change the way managers are paid. If they are paid on size and short term performance they will go along with what everyone else is doing.

Other People's Money -- You should not be able to take on a risk and then package it and sell to others. You should have to retain a piece of the risk so you have skin in the game.

This article and hopefully the book will be must reading for those few of you that really want to know why it fiasco happened and how we can prevent it in the future.

Jim Van Meerten is an investor who writes on financial matters on Seeking Alpha and
MSN Top Stocks. Please leave a comment below or email JimVanMeerten@gmail.com

3 Comments – Post Your Own

#1) On May 24, 2010 at 1:21 PM, silverminer (30.78) wrote:

By extension, if we already know why the fiasco happened and how we can prevent it in the future, does that mean it belongs on our "must not read" list? :)

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#2) On May 24, 2010 at 1:22 PM, TMFJake (59.40) wrote:

Great article.  Thanks for the link Jim.

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#3) On May 24, 2010 at 1:22 PM, TMFJake (59.40) wrote:

@silverminer:  Ha!  Yes, regulartory reform ensures history won't repeat itself, but it will rhyme!!

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