Cyreenik Says
The credit crisis of July has deepened. People, important financial people, are now crying out for action. Now, more than any time in the last five years, is the time for blundering.
The two elements needed for an impressive series of blunders are now in place.
A) There is a novel situation. A situation which is not like other scarey situations faced previously.
B) A lot of people are scared and calling for action.
This is a Panic Situation, so, I predict that over the next six months, a series of serious blunders will be committed. Actions will be taken that seem right right now to those people closest to the situation, but two years from now they will look incredibly stupid and expensive. Today only "cool heads" will argue against taking the blunderous actions, but they will not offer better feeling alternatives.
The blunderous actions taken will fall into two catagories: Stop the Pain and Kill the Messenger.
Stop the Pain actions will be things such as Bernake putting another $18 Billion into the monetary system to restore confidence. These are quick, short-term actions. The biggest problem with Stop the Pain actions is if they are taken as signals that risky investments won't be allowed to fail. That sentiment is a big problem, and the usual outcome of it is crazier investments over time and hard-to-root-out inflation.
Kill the Messenger actions will be laws that attack the symptoms of a problem rather than the root causes. A classic Kill the Messenger response was the US attacking Iraq after 9-11. (By the way, I just saw on the Internet a fascinating Dick Cheney interview segement where, in 1994, he is explaining all the good reasons for not going all the way to Baghdad as part of the 1991 Gulf War. He lists all the things, point-by-point, that have happened to the US in the 2003 invasion. How fascinating! -- by post 9-11 2002, he had forgotten all he knew in pre-9-11 1994. It's a perfect example of Panic Thinking: 9-11 scared Dick Cheney badly, and he went into Panic Thinking mode.)
Another example of a Kill the Messenger blunder was Congress passing the Sarbanes-Oxley Act of 2002 in response to the panic caused by the Dot Com Bust and the Enron/Worldcom Scandals. The act put a lot of new expense and risk on the heads of public company managers. This helped popularize Private Equity buyouts as an alternative which cut costs and gave managers more flexiblity in dealing with company turnaround crisis. Which is part of the easy money problem we are having today.
That's what I have for August,
Cyreenik
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