Saturday, February 21, 2009

"Grandpa, Don't Blame Us!"

Paul Volcker, former Chairman of the US Federal Reserve, gave a speech Friday. The media picked up on it because he showed a little leg in comparing today's crisis as such:

"I don't remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world"

View the video below.

I'm not interested in the quotes about the depression. We already know this is just as bad or worse. What I was interested in was the story he gave at the end. About his grandson, a financial engineer.

More specifically, the response his grandson gave him after hearing about some less than nice things said by Volcker about financial engineers.

"Grandpa, don't blame it on us. We were just following the orders of those guys up above, getting those big salaries that told us to design all this stuff."

I'm interested is this because it is shockingly in-line with Generational Theory. An entire generation (Gen-X) of these types were ushered into the financial world at around the same time Boomers were taking over for their Silent generation elders in corner offices everywhere in the western world. This was happening around the early/mid-90's when the internet and computers were becoming the new thing.

For the most part, boomers had very little understanding of the "new-age" technologies. But their underlings did. They had been schooled on MS-DOS and could come up with an answer in seconds to any question using a combination of their quantitative analysis learned at Harvard and computer skills.

All over the western world, there were 20-something mathematical geniuses reshaping our financial world. They thought their superiors were too careful to allow anything bad to happen and the superiors thought the kids were too smart to allow anything bad to happen. "Just keep doing what you're doing, kid. You're making us all rich."

This is the root of our crisis today. It has very little to do with subprime mortgages or fiscal deficits. Those were symptoms of the above reckless abandon our financial system allowed to grow out of control. It happened at precisely the same time all of those who had experienced the Great Depression began retiring. Those that took over thought they were too smart to allow anything like it to happen again. Government regulators and ratings agencies went along for the ride (as they always do). And so their collective actions made the Depression's recurrence an inevitability.

Pointing fingers doesn't usually get us anywhere. But expect a lot of it over the next few years. Boomers will blame Gen-Xers for promising them that failure was "basically impossible." Gen-Xers will blame Boomers for never second guessing them. The few remaining Silent Generation will shake their heads in disbelief at the stupidity of both. Government will plead the 5th. And the younger generations will become increasingly angrier as their career opportunities wither and it becomes apparent that all the finger pointing is getting in the way of allowing a recovery to take root.

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mike.montchalin said...

It seems there was a concentration of money in the hands of just a few decision makers. And it wasn't those decision maker's money.

That is the decisions, or opinions, of the ratings agencies decided the direction a lot of money would flow, and it wasn't their money.

The decisions of hedge fund managers affected a lot of money that was leveraged, and it wasn't their money.

The spending of congress, committing future taxes into the infinite future, in essence was a handful of politicians directing huge flows of money.

The same is true all the way down to the clerk working all day long approving mortgages.

The actions and inaction would have been a lot different if individuals had taken responsibility for their money and their agents (congress & bankers.)

olives said...

It makes perfect sense Matt - and this credit cycle has been longer than those in the past simply due to longer lifespans/later retirements.

mike.montchalin said...

Does this mean the FED's loose money policy was largely irrelevant in prolonging the credit cycle and demographics was the driver?

Just asking, because some people believe the FED follows interest rates; and doesn't set them as most people believe.

Matt Stiles said...


I don't believe the Fed is nearly as relevant as some people like to believe. It is one issue I take with many utopian-Austrians who argue that there would be NO business cycle without the Fed. Due to demographic and social herding impulses, I still believe there would be a business cycle - but the Fed simply makes it more pronounced at both ends.

And yes, the Fed does react to short term rates. But how much short term rates are affected by the Fed - verbal or physical - is unquantifiable.

Irrelevant? No. Exaggerated? Probably.


unfazed said...

Funny we didn't have that option when I got my engineering degree.

This kind of inattentiveness is not restricted to the financial markets. There is so little accountability these days in many of the esteemed professions. Jane Jacobs calls it a decay of one of the stabilizing pillars of society. Enough pillars crumble and the next Dark Age begins.

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