Saturday, October 17, 2009

All In Fun

It's all fun and games until somebody gets hurt.

From Krugman of 15 October 09: thing that’s hard to convey is how boring business seemed in the 1960s and 1970s. (”I’ve got just one word for you: plastics.”)

But even a decade later, it was the guys who went off to investment banks who were buying the third homes.... And it wasn’t just the money: business stopped being so boring, and was even getting to be fun for some people.

I thought that was an interesting observation. What else was happening at that time?

The late 1970s and early '80s was a period of rapid financial change.

From the Wik:

Deregulation gained momentum in the 1970s, influenced by research at the University of Chicago and the theories of Ludwig von Mises, Friedrich von Hayek, and Milton Friedman, among others. Two leading ‘think tanks’ in Washington, the Brookings Institution and the American Enterprise Institute, were active in holding seminars and publishing studies advocating deregulatory initiatives throughout the 1970s and 1980s.

It was a time of rapid financial change enabled by deregulation. And what else was happening? Well, there was a recession in the early '80s:

The recession came at a particularly bad time for banks due to a recent wave of deregulation. The Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) had phased out a number of restrictions on banks' financial practices, broadened their lending powers, and raised the deposit insurance limit.... Banks rushed into real estate lending, speculative lending, and other ventures just as the economy soured.

Coincidences happen, I guess. Anyway, the recession ended. Deregulation continued. The rush into "real estate lending, speculative lending, and other ventures" resumed. Things seemed to be going pretty well for a while. At least it wasn't boring.

Krugman describes what happened since the '80s in a post I've referenced before:

Traditionally — i.e., before the 1980s — the public put its money in banks, and banks made loans to borrowers: thus the diagonal arrow from banks to borrowers represents traditional banking.

By 2007, however, much of this traditional channel had been supplanted by shadow banking: debt was securitized, and the securities sold to the public — the straight arrow across the bottom of the figure.

Then the crisis came.

Yep. The crisis came. I want to repeat something I said back in March of this year:

When the economy went into its excessive-credit phase, speculative profits became irresistible. Deals that sounded to good to be true (such as those offered by Bernie Madoff) became irresistible. Everybody wanted a piece of it. Everybody was making money off it. Nobody wanted to stop it. Yeah, it would be better if we stopped it then. But nobody wanted to stop it, then. Eventually, it stopped itself.

But it was fun while it lasted.

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