WHAT THE HECK HAPPENED?
By Brett Sherman
As a general rule, we tend to ignore the lessons of our financial past whenever markets are humming and money is flowing. Economists have long believed that market bubbles come along every 15 - 20 years, the approximate length of the financial memory. After 15 years or so, unpleasant consequences of the previous bubble are forgotten and a whole new generation of con artists and suckers come along, full of hot air and ready to blow. Presto, a new bubble is inflated.
Something about bubbles clearly has changed in the first decade of the new millennium. 15 years between huge bubbles? Hah. This decade saw the implosion of two massive bubbles. First tech stocks went ka-boom. Then, almost immediately, the housing bubble began to inflate. And, well, you probably know how that ended.
Consider the last market bubble, the tech-wreck. Remember proclamations of a a new age of prosperity, a "new economy" in which the old rules of Wall Street no longer applied? Remember all the "paper millionaires"? Remember Dow 36,000? Remember irrational exuberance?
Remember how the tech stock driven new economy ended? Of course you do. The bubble popped, the market deflated, billions were lost.
Wall Street executives (not to mention financial risk managers) may have short memories, but we're talking about recent history, the immediate past. The tech bubble received quite a bit of media attention too. It was a textbook market bubble. And it was fresh in Wall Street's collective memory. So don't believe the nonsense about the housing bubble being a surprise or catching anyone off guard. By 2005 at the latest, the housing market bore the classic hallmarks of a market bubble. By definition, all bubbles are unsustainable.
Even if Wall Street execs didn't foresee the extent of the current disastrous financial crisis, they sure knew the unprecedented inflation of home prices and home ownership was a mammoth bubble. They knew it would end badly.
How could Wall Street be so naive as to allow a huge asset bubble to inflate on the heels of the tech-wreck? Naivety had nothing to do with it. What happened to the 15 year financial memory? Not a thing. Wall Street forced the housing bubble on the American people. Investment banks needed lots of mortgages to stuff into mortgage-backed securities.
But how, you ask, could Wall Street knowingly play a leading role in the inflation of the housing bubble if it was certain to end badly? Hints - Look up the antonym for altruism and think about multi-million dollar paydays.
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