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Pearls of Wisdom 1: On 2009 Economic Crisis: Serious problems could lead to terrible serious problems.
Q1: CM: How serious is the present economic mess?
CM: Deadly serious, it is the worst mess since the Great Depression. The Great Depression caused Adolf Hitler to rise in a formerly civilized nation. You can’t predict what happens when people get dissatisfied enough. We have a deadly serious problem, and it could lead to terrible problems.
Pearls of Wisdom 2: 10 Causes of the 2009 economic crisis which is lollapalooza event.
1.Abusive practices in consumer credit. People who couldn’t handle credit were deliberately seduced.
Q2: CM: What caused the economic mess?
CM: It was a lollapalooza event – a confluence of causes, that is how complex systems work.
All of the following helped:
1) Abusive practices in consumer credit. People who couldn’t handle credit were deliberately seduced. People who did it justified it by saying competitors would do it if they didn’t. That is not proper. Sometimes you should let others proceed and not copy them. It is abusive folly. I talked to a plastic surgeon last night who used to let people write checks against a line of credit on their house. Now his clients are finding those credit lines harder to get. A multiple credit card borrower is dangerous. He can look great right up until he goes bankrupt. Banks have abused their prerogatives and have stuck it in too hard. I have a fundamental theory that in some way the world is just, and if you do something immoral or stupid there will likely be a whirlwind someday where you get clobbered.
2. Mortgage brokers – often these are scum of the earth rejoicing in “rooking” the borrowers with flim-flam tricks, which often can happen with minorities in poor neighborhoods. (Horrible mess created.)
2) Mortgage brokers – often these are scum of the earth rejoicing in “rooking” the borrowers with flim-flam tricks, which often can happen with minorities in poor neighborhoods. On first and second mortgages – they built a huge balloon bound to create horrible mess, and the mess finally happened.
3. Wall Street went crazy (not in a good way)
3) Wall Street went crazy. Any way of earning money short of armed robbery was ok. The last mortgage broker Merrill Lynch bought were a bunch of sleazy crooks even on the face of it. When people behave like that you get a tremendous mess.
4. Regulatory apparatus that allowed all this was also foolish. The regulators and legislators were in two categories.
4) Regulatory apparatus that allowed all this was also foolish. The regulators and legislators were in two categories. Legislators wanted poor people to have houses, but this is a bad idea since you want credit practices to be sound just like you want your engineering practices to be sound. People making money just rationalized what they did. Accounting systems spit it out as okay, even though in substance it wasn’t right. It was ghastly and there was huge envy in the thing. If Joe made $3m, I’m better than Joe and so I deserve $3.5m.
5. Credit system was the repo system, one of best ways to grant unlimited credit ever invented. Then banks offered access to the repo system to hedge funds. It went to enormous excess.
5) Credit system was the repo system, one of best ways to grant unlimited credit ever invented. Then banks offered access to the repo system to hedge funds. It went to enormous excess. Some of it was due to democratic legislators hoping to help the poor, and some also was due to Republicans who overdosed on Ayn Rand. For Republicans, it was like legalizing armed robbery for anyone under 25. It was like letting the financial class prey on the poor. If it was unreasonable for the buyer, you got 9% for selling it. Ethos was of the “buyer beware”. The vendors in America should care about selling good stuff to the customer.
6. Dizzy leverage on stock indices and CDS
6) Then the other issue was in terms of dizzy leverage on stock indices and CDS – where anyone could bet someone would go broke, even if they had no economic interest in the outcome. Then you could help that person along to ruin. We prohibited this in life insurance. I can’t buy insurance if I don’t have economic interest in the person (spouse, etc). These wise rules were thrown out in CDS markets. Then the people who did the accounting used mark to model. Both sides would allow profits. Anyone with engineering cast of mind will feel like throwing up into the aisle. Well go ahead, it will be a memorable moment if you do [laughter].
7. Phony Accounting
7) Accounting was phony because all the customers wanted it phony. Commissions were awesomely large, and it influenced people. And Greenspan was saying it was all for the best in the best of all possible worlds. To allow predatory class of people to do whatever they want to others is not like free enterprise at restaurants. The whole thing could go… back in September it was as if every bank deposit became unavailable – it looked like whole system would come crashing down last fall, and it accelerated downwards.
Saving Grace (Luckily the government was awake, and was sensible enough to try to fix the situation.)
8) Luckily the government was awake, and was sensible enough to try to fix the situation. To fix it, we have to save the banks. That doesn’t bother me, if you want perfections you don’t live in this world. We had to save people who didn’t deserve it, but it was important. It was smart government, taking over Fannie and Freddie and reducing mortgage costs. It was a correct decision.
9) Bank situation is much more complicated issue. The traditional way is you don’t hear anything about the regulatory process, then you hear about the results after. There was no bake off – and that is a good system. The announced contest [ed: the stress test] makes me dubious, but it is better than nothing. Some banks should get more financing. Averaged out I would give Treasury Dept good marks, though I don’t look forward to what they likely will do to WFC, since we own a lot. Their credit costs them so much less. Treasury are using a one size fits all. I would give WFC a flaming pass. But if it is a little unjust, maybe their duty is to take their medicine. When we have this much trouble, everyone shouldn’t be screaming for the last iota. I think everything is working out fairly well. Much of what has been done has been done beautifully.
Source: http://www.valueplays.net/wp-content/uploads/The-Best-of-Charlie-Munger-1994-2011.pdf