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Now Really. What Started the Recession ??
By Marek W. Stupka | April 24, 2009
With many investors finally being “sick and tired of being sick and tired”, and with some macros evidently showing signs of bottoming, winds of hope are being blown into the sails of the capital markets. Looking retrospectively at the mess behind us, people ask: What has really caused this?? What’s started the recession, in the first place?
There are, of course, many theories trying to answer this question. In any case, I don’t believe the recession trigger was a highly-complicated matter that only a limited number of carefully selected economists has the right to understand.
I believe everybody should know what the recession trigger was to really understand the current status-quo and the possibilities for the future. I also believe we should all do our part so that similar things won’t happen in our future world.
First of all, the 2008-09 recession had been caused by greed. By limitless, uncensored greed of the top managers and owners of the biggest financial institutions, mostly in the USA but also in other countries of our Western world. To be specific, let’s just mention one genuine example of a financial giant that has: A. Played its part in triggering the recession, B. Had to face the music and pay the price when the crisis hit.
A perfect example is the former biggest insurer in the United States - American Insurance Group. When the storm came, AIG was two companies. One was a rock solid insurance company. It made money the old fashioned way. It had terrific management, and offered steady, quality insurance. Its tables were not fraudulent, it was insured by the states and heavily regulated. This forced AIG to be above board and had a regular earnings stream. It made money over centuries! Not a lot of companies can say that.
Now the top managers and owners of the AIG group took this triple-A-rated company and decided to throw a giant hedge fund under its umbrella. The whole motivation was pure, irresponsible, non-censored greed of the AIG big sharks. If it worked out, they’d all have made billions of dollars. Unfortunately, the risk was enormous - and it just didn’t. The people who set up this hedge fund literally rolled the dice on the whole company.
Now, let’s wind down the whole thing. This is the same frustration with Citigroup and Bank of America, the same story you hear from other banks, insurers, even non-financial institutions all over the globe, too. We all now pay the consequences for the fact that somewhere, sometime not long ago, some monkey boss decided to “roll the dice” and jeopardize an otherwise sound and healthy business by creating a hedge fund right next to it under the same hood - that sucked out all the money from the healthy operations once the recession storm finally hit both of them !!
The real problem, of course, was not the existence of the hedge funds themselves, but the extremely risky assets they unanimously began to invest in, since “everybody had been doing it at the time”. It was that being a “monkey boss” became a new fashion among the big sharks…
Another reason to the recession was the governmental tolerance of extensive indebtness, either institutional or individual, caused by the fact that what the former US Government really stood for was - when we peel down all the rubbish - the war itself. But I have already expressed my views on this issue several times, feel free to search the Archives to find more.
So you see, for the future, it is up to every one who is in the top management position to simply realize the consequences of accepting a risk level that is too high. And here as well as in trading, by the way, the same principle applies: IT PAYS TO STAY CONSERVATIVE. ESPECIALLY OVER THE LONG HAUL. IF YOU WANT TO AVOID YOUR PERSONAL RECESSION IN TRADING, YOU SHOULD KEEP THIS SIMPLE RULE !!
Topics: Miscellanous |
April 24th, 2009 at 9:48 pm
Hallo
Well written. I would also add that former Fed chairman Alan Greenspan is the man to blame - he had the power to avoid the crunch long before it began
Happy trading to you all
Chriss
April 25th, 2009 at 6:06 pm
Hey Chris,
thanks for posting.
No, I personally do not believe Mr. Greenspan should be held responsible for this. He as FED’s chief did things that were OK, considering the circumstances and macro results of his time.. Sure, he might have put more emphasis on regulation, but we have to realize that the US FED is in fact a corporate entity based in Delaware, and one can not blame a corporate entity - even of this type - for not being able to eliminate a calamity caused by whole industries.
Oh, and one more thing. Ultimately, it is the US Government that is responsible for setting the wide scope in which FED operates. So if you dig deep you realize that these guys WERE responsible for not stopping things from messing up in the end, not the FED guys.
Trade wisely,
Marek
July 27th, 2009 at 2:20 pm
the Economic Recession has been pretty hard on us. some of my friends lost their job because of the massive job cuts. i just hope that our economy becomes better in the following years.