Sunday, November 23, 2008

Fear and Loathing in my 401K

Every so often you need to sit back and take a more detached look at what is going on, particularly when there seems to be a new event every day. The current issue is the all engulfing financial crisis. Taking the long view allows you to look past the current pain in your 401K. Like may others I know that I am not going to be retiring any time soon. I have commented previously on the risk of unregulated markets, here are some more thoughts.

One big question is who is responsible. One group of people are working hard to establish that is is not the responsibility of the current hapless President, but is something that was foisted on him by his wily predecessor and the Democratic Congress from way back when. Well, if you believe that the role of government is to stand aside and let events unfurl, as the administration has on several occasions, then it is clearly not the responsibility of George W Bush. On the other hand, if you believe that the role of government is to at the very least steady the tiller, then the current administration has been asleep at the wheel.

Another thought is that nobody is responsible, it is just a natural consequence of a complex financial system. Several people have commented that the complex derivatives made the system less volatile, however they also increased the probability of a huge collapse. I was reminded of a blog post from some time ago that referenced an IEEE Spectrum article that electrical blackouts are inevitable. This was after the big blackout of 2004. If the conclusion is that the highly regulated and controlled electrical industry will have a big blackout every 35 years or so, then the loosely regulated financial is also bound to have big blackouts every so often. Chaos theory rules.

Here are some of people who I have been following:
  • Paul Krugman, recent Nobel prize winner, called the problem in the housing market in 2005. He is a careful person who takes care that what he says is totally defensible. Something that I am sure infuriates his many detractors.
  • Andrew Leonard on How the World Works pulls together a lot if interesting ideas. He muses on everything from the demise of petro-empires to the demise of his bank: Washington Mutual.
  • Igor Greenwald's Taking Stock blog on Smart Money. The latest word from someone close to the trading floor on Wall Street.
  • Michael Lewis left the money business and wrote Liar's Poker because he wanted to write and did not believe that the decade of greed could continue. Well, the financial world took another 20 years before it blew itself up, and Michael Lewis has just written a great retrospective article for Portfolio.

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