I think the key macro financial lessons of the Crash are:ResearchMed wrote: ↑Fri Sep 07, 2018 9:31 amI 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.
- 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