There were no unusual dramatic events-until recently. We weren't reading about a credit crisis on the front page-until a few weeks ago. Members of Congress were protecting their interests (until recently) by claiming that Fannie and Freddy were doing a wonderful job. No dramatic bad news---until the bad news was all we heard. There were drips and drabs of bad news-which were not credible to most people, because they kept churning out the money. Who wants to hear someone say, "You're making too much noise", when we are having a party? Leave me alone.
3. You ignore "baseline" information-the real "averages" and "odds"
The baseline information should have been--- how often do people pay back money if they can't afford to pay it back? Optimists would say, "Look, the economy is in great shape. Unemployment is 6 % (not historically that high), we had growth in GDP in the last quarter, and the stock market is still in relatively good shape." The realist would say, "Nice try. But your optimism is due to looking in the rear-view mirror. You are looking at the past. The future is going to be different. Here is why it will be different. You are holding a lot of debt from people who don't have the money to pay it back. And the investment banks are highly leveraged. You are killing the currency."
"But look!", the optimist responds in glee. "I have a lot of money in my 401K".
The gloomsayer says, "You do--for now".
Just wait.
4. You assume that because nothing bad has happened so far that you are safe.
"I've heard these warnings before. Nothing really bad has happened." This is like the happy Russian roulette player. He feels safer with each pull of the trigger. Nothing has happened so far, so I must be safe. Let's raise the bets. I'm feeling lucky.
The roulette player keeps increasing the bets with each click of the trigger. "I must be invincible", he confidently proclaims. "Yes, of course, it's a new economy. It's not the old fundamentals. Forget about that. We are living in a new age. We have new instruments of investment. We have derivatives, mortgage backed securities, swaps, and who knows what else.
Because of this we are safe. It's all so complicated-even I, with my fancy degrees, don't know what the hell I'm saying. Everything is hedged. You've bought insurance with these investments."
And, the optimist spins the barrel of the gun to test his luck.
5. You focus on what you think will happen the next time-"The next cigarette won't kill me".
The wonderful thing about leverage is that the more you have the richer you feel. You borrow against assets that become less valuable. You think, "I can buy that house that is just out of reach". You assume "There is a bigger sucker down the road".
There is. It's you.
6. You ignore "cumulative risk"-how risks build up over time.
As you take more and more risk in your investments and spending you ignore the fact that the entire market is getting riskier. What goes up eventually comes down--on your head. But, you said back then, "It can't be risky. Everyone is doing it, everyone is getting into the market. "After all", you say to yourself, "the price of real estate in South Florida has been rising." That was a couple of years ago. You and your excitable friends were getting closer to the edge of the cliff.
You thought you were climbing a mountain. Ooops.
7. You want to avoid thinking about things that are upsetting-so you avoid thinking of real problems-"I'd rather have a drink"
You don't want to hear about the market, about mortgage backed securities, about the dangers of subprime mortgages, about extending your debt on your credit card. Who wants to hear bad news? Not you. You're an optimist. You believe in the future. Get rich now while the getting is to be gotten. Do it now. Don't bother thinking about the risk. After all, haven't a lot of people made a lot of money already? Where were you? Oh, don't worry, it's not too late. You can take a loan at very low interest with almost nothing down. Here's the wonderful thing about it. You can also take a home equity loan right after you close on the house. Then you'll have even more money in your pocket. Oh, don't listen to those pessimists. They must be depressed. They should be taking medication. They always spoil the fun. Don't bother yourself with those depressing warnings. Don't you believe in yourself?
8. You do not want to experience the discomfort of making a change-"It's too hard".
Can you imagine the resistance that Paulson would have heard if he had come up with this plan a year ago? No one would have believed him. Nothing bad had happened. Real estate prices in New York were still rising. People were still making money. To make a change would have seemed too hard, too politically damaging, too Un-American. Who needs it? The party is still going on. Paulson would have looked too dour.
Ummm. He did give us some warnings in 2007, but no one wanted to hear it.
But now he has been heard. Loud and clear. Finally. Of course, he had to make us realize that the sky was falling. He had to shake us out of our optimism.
Paulson had to close the door after the cattle got out. The bull market was over. The bull..... was over.
9. You prefer to procrastinate about things that are not affecting you right now-"I'll wait until I'm ready".
A year ago no one was being affected. Nothing had hit the fan. Everyone felt rich and clean. Warnings about the coming crisis were out there, but no one was ready to make a change and few people thought it was needed. You can put off doing anything because no one was being affected right now. It was 2007. You can do something when you need to do it. Of course, by that time---today-- (September 2008), it would have a heavy price-tag. A lot of people would lose jobs, lose part of their life savings, there would be more blood under the bridge. But in 2007 the party continued, you could put off doing anything. After all, there is nothing like instant gratification to make you feel safe.
And, after all, if you worked on Wall Street and you were high up on the hog you could count on a golden parachute. And, in any case, you probably believed your own bull.
It's funny in life. Sometimes there's a group of people who continue talking to each other-and they get dumber every minute. They actually believe themselves.
Oh, by the way, here's 700 billion dollars. Don't spend it all in one place. Have a nice day.
