Lessons from the financial crisis (Pisani, CNBC)

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Valuethinker
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Re: Lessons from the financial crisis (Pisani, CNBC)

Post by Valuethinker » Sun Sep 09, 2018 11:20 am

ResearchMed wrote:
Fri Sep 07, 2018 9:31 am
I thought this was interesting, and wasn't CNBC's regular financial porn:

https://www.cnbc.com/2018/09/07/bob-pis ... -nyse.html

There are some interesting observations/thoughts to think about, although it should be obvious that no one knows what might happen "next time", etc.

it's also especially interesting given that we experienced this, and can remember some of the claims/predictions/etc., at the time.

RM
I think the key macro financial lessons of the Crash are:

- don't think that if you deregulate, the financial services sector can look after itself. The nature of finance is that it is a confidence game, and when confidence ceases, it collapses like a house of cards. In addition, it is the nature of financiers and finance that they will always push the limits of safety in the pursuit of personal profit (we call that "the Principal-Agent problem" in economics). Risk to their shareholders or to society as a whole be damned.

Adam Smith was right. Finance has a moral dimension. And one would be wise to beware of any collusion (in any industry) of captains of that industry.

- always be suspicious of innovation in finance. For every invention like the index mutual fund, there is one with harmful consequences like the CDO. Paul Volker's gibe that "the last thing invented in finance that was of any use to society is the ATM" has a grain of truth in it.

- banks are special in the financial system in their role as intermediaries and depositories and the thing that they need more of is capital. The safety margin of a bank is lower leverage (Total Assets/ Equity Capital). Fancy funky weighted Calculations (Basel II/ III) don't do it. Banks need lots of equity capital.

This is one lesson that has been learned. American banks in particular now have a lot more equity capital than they did in 2008. Europe the picture is muddier and the capital instruments (such as CoCo bonds) are less useful.

- banks are effectively utilities. Just as there have to be strong measures to prevent the lights going out, or the gas supply ceasing when it is 10 below in January, so too do we need strong systemic measures to keep the utility functions of banking working.

- liquidity always dies in a Crash at some point. People get afraid to lend to each other, and particularly to financial intermediaries, and lending stops and that's like turning off the plumbing in a crowded hotel on New Year's Eve. Pretty soon the party stops.

Providing emergency liquidity is one thing the Authorities can do - the Central Banks, if they act quickly, can make sure there is enough cash around (but they cannot make people lend it).

On a personal investing level

- you need a plan and you need to stick to it. Shut off the computer if it is all getting too stressful

- when you set that plan you need to imagine that awful things can, and will, happen. Thus you probably need more safe instruments (in a US context: TIPS, ibonds, US Treasury Bonds) than you think you do. If you are working this might be 1-2 years of household expenses, because financial crises and associated recessions often bring long periods of unemployment.

Most of us tend to run with too much equity because we cannot imagine a world where that money just vanishes as if it were never there.

- correlations go towards 1 in a crash. Your international equities are not likely to save you. Neither are your REITs. Gold is a big maybe. Even TIPS performed badly (for a bit) due to liquidation of collateral portfolios by hedge funds (apparently).

- beware of blandishments to increase your personal debt levels, because this makes you more vulnerable when the downturns come

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AtlasShrugged?
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Re: Lessons from the financial crisis (Pisani, CNBC)

Post by AtlasShrugged? » Fri Sep 14, 2018 6:30 am

The effect on the real economy and ordinary lives of a global bank run is not imaginable.
Valuethinker....Thanks for the thoughtful reply. Much grist for the intellectual mill in your response.

Perhaps the time period immediately after WW1 is instructive here (1920-21). What we did there (or more precisely, what we did not do) is what really got me thinking about the wisdom of extreme government intervention.
“If you don't know, the thing to do is not to get scared, but to learn.”

Valuethinker
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Joined: Fri May 11, 2007 11:07 am

Re: Lessons from the financial crisis (Pisani, CNBC)

Post by Valuethinker » Fri Sep 14, 2018 8:38 am

AtlasShrugged? wrote:
Fri Sep 14, 2018 6:30 am
The effect on the real economy and ordinary lives of a global bank run is not imaginable.
Valuethinker....Thanks for the thoughtful reply. Much grist for the intellectual mill in your response.

Perhaps the time period immediately after WW1 is instructive here (1920-21). What we did there (or more precisely, what we did not do) is what really got me thinking about the wisdom of extreme government intervention.
The usual analogies are made to the period 1932 and post in US regulation: SEC, Glass-Steagal, Investment Company Act. FDIC. etc. That architecture of regulation.

And again 1944+. In particular Bretton Woods, the IMF & World Bank, the system of international monetary (and economic) stability that lasted until 1971.

Marc Levinson is a good economic history author. He wrote The Box about containerization-- one of the revolutionary wonders of the post war world, that made possible a lot of modern globalization. He has also written a good history of the 1970s & 80s from an economic perspective - when the postwar prosperity of the Bretton Woods system seemed to come off the rails.

I had not really thought about the 1919-21 world. The fact is for much of the world (in particular the former Russian Empire) the World War continued after 1918. And the Spanish Flu (which wasn't Spanish but seems to have started in America, crossed to Europe with American soldiers then crossed back) hit which killed more people than WW1 had in the space of about 12-18 months (something up to 100 million people).

The President had a stroke and was an invalid for his last couple of years in office (?vague about the exact timing). Congress blocked his efforts to create an international architecture of peace. The world lacked men of the stature (or at least the power to get things done) of Franklin Roosevelt, Harry Truman, Dean Acheson, General George Marshall, John Maynard Keynes. They still stand as giants and we as pygmies in their ruins.

But I had not thought much about the financial developments 1919-21 and don't know much about them.

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