Spare me the dramatics. Spare me the countless column-inches of ‘how did it happen?’ analysis. The most surprising aspect of the recent financial market crisis has been the surprise itself. It was always going to happen. Now that it has, perhaps we can remind ourselves of a few home-truths. 

At its core, the current economic situation is no different from any previous collapse. It boils down to too many financial institutions lending too much money to too many people in excessively risky situations.

It’s been an orgy of lending. Not only have banks been injudiciously lending to house-buyers. Financiers have been injudiciously lending to the banks so that they could lend more to house-buyers. 

Meanwhile, the suppliers of all the stuff we use have been freely extending credit to department stores so that they could buy more stuff to sell ... on credit. As I write, a number of U.S. retail chains are going to the wall having overextended themselves in both directions.

The only real difference between this credit crunch and previous versions has been that the monetary manipulations this time were the financial equivalents of a triple twisting, double somersaulting dive in the pike position. Nevertheless, as we’ve now been reminded, no matter how fancy the gymnastics, a dive always ends in a splash.

And so to the home truths. The single biggest factor in the drama surrounding the current collapse has been - and herein lies a broader lesson for all of us - the total disregard for the fundamentals, the basics, the simple truths. 

Every week, the financial advisor on a local radio station repeatedly reminds callers that when it comes to money, the bigger the reward, the bigger the risk. Yet as the rewards have piled up, few have dared to consider the riskiness of their situation.

Another example. Anyone who has done any investing will have been reminded (if only in small print) of the maxim that past performance is not an indicator of future performance. Yet for the last few years a great many - including numerous slick-selling lenders - have chosen to ignore this truth. 

In fact, as it’s all gone pear-shaped, our ‘self-serving bias’, as psychologists call it, has blossomed. This is the tendency to take credit for the wisdom of our decisions when things go well but blame others when they don’t. (Listen to a politician if you need an example.)

In virtually every aspect of life - business and work, parenting, fitness, golf, you name it - there are well established simple truths. The challenge is not to forget them in the ever-tempting desire to ‘get rich quick’.

Attachments:

Home Truths of a Financial Collapse.pdf

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